Tax on Scholarship Income

Understanding taxation can be challenging, particularly when it comes to scholarship income. Whether you’re a student or an academic professional, the intricate regulations surrounding the taxation of scholarships can feel like a confusing maze. Our goal is to simplify this process by dissecting the complexities and presenting a clear understanding of when and how scholarship income should be taxed.

Understanding the Terminology

To best navigate the taxation of scholarship income, it’s first crucial to understand the relevant terms per HMRC’s guidelines. These terms form the backbone of our discussion.

• Scholarships: In the broadest sense, scholarships are monetary awards given to individuals to facilitate their studies or training. Generally associated with academic achievement, scholarships are funded by a variety of entities, including, but not limited to, educational institutions, philanthropic organizations, and private corporations.
• Research Awards: These represent a specific category of financial aid provided to individuals or research teams. As the name suggests, these awards are primarily dedicated to facilitating research activities, often contributing towards the cost of materials, travel, and other research-associated expenses.
• Fellowships: Fellowships constitute grants presented to individuals, typically postgraduate students or academic researchers, enabling them to focus on their studies or research. One key characteristic of fellowships is that they usually exempt recipients from teaching duties or other services, allowing them to concentrate on their academic pursuits.
• Full-Time Education: HMRC’s definition of full-time education extends beyond a simple headcount of study hours. It encompasses over 21 hours of study, tuition, or work experience per week over three months. This holistic definition takes into account the total academic commitment of a student.
• Educational Establishments: According to HMRC, educational establishments are institutions where individuals receive full-time instruction. This umbrella term includes schools, colleges, universities, and other institutions that offer vocational or technical training.

Tax Implications of Scholarship Income

Typically, in the UK, scholarships, fellowships, and bursaries awarded to students in full-time education are exempt from income tax, as outlined in Section 776 of the Income Tax (Earnings and Pensions) Act 2003. This tax exemption applies regardless of the entity providing the scholarship or the age of the recipient. The primary condition is that the scholarship is used for pursuing a course at a recognized educational establishment.

However, it’s worth noting that certain situations could lead to a departure from this general rule, necessitating a scholarship to be treated as taxable income.

Taxable Scholarships

1. Employment Connections: A scholarship can be considered taxable if provided by an employer or a relative’s employer, and either the recipient or their relative is an employee of the entity granting the scholarship. This is particularly applicable when the scholarship scheme is not open to the general public or the selection process shows a preferential bias towards relatives of employees.
2. Service Obligations: In cases where the recipient is obliged to perform certain duties or services as a condition of receiving the scholarship or bursary, it might fall into the taxable category. It’s important to clarify that this doesn’t include typical academic obligations like attending classes, completing assignments, or passing examinations. Rather, it involves obligations beyond the regular academic or research requirements.
3. Research Grants: Research awards or grants may be taxable, especially if the research is conducted for the benefit of the grantor or if the recipient is not officially classified as a student.

HMRC Statement of Practice 

The Statement of Practice 4/86 (SP4/86) issued by HMRC offers additional insights into how scholarship income might be treated for tax purposes. It specifies that when a student receives payment for services, such as teaching or research, as part of their academic course, the payment can be bifurcated into two segments:

1. A portion is classified as a scholarship, which is tax-free.
2. An employment income part, which is subject to taxation.

The dividing line between these two segments hinges on whether the services performed by the student are a mandatory part of their course or are optional, going beyond their course requirements. If the services are the latter, the income associated with these services would be taxable.

Scholarship income tax in the UK is complex. Some scholarships are tax-exempt, while others may be partially or fully taxable. Factors include scholarship nature, recipient status, and employment links. Students should learn these tax principles and seek advice if needed. It is as important as understanding tax obligations and benefits.  If you need help with Tax Planning ; we have tax experts who can help you. Call our office to discuss your case.