Paying Children’s University Fees

Using a business to pay for a children’s school or university fees can be complicated, and it is essential to understand the tax implications and HMRC’s guidance on this issue. While there are some legitimate ways to use a business to support educational expenses, there are also tax avoidance schemes that can fall under the General Anti-Abuse Rule (GAAR). A potential option for using a business to pay for a child’s education is employing the child within the business and paying them a salary. This salary can then be used to pay for school or university fees. However, the following conditions must be met:

1. The child must genuinely work for the business and perform tasks relevant to their age, skills, and experience.
2. The child’s salary must be in line with the market rate for the job they are performing and not excessive compared to what an unrelated employee would receive for the same work.
3. The child must pay tax and National Insurance contributions (if applicable) on their salary, just like any other employee.

Children have a personal allowance, just like adults. For the tax year 2022/2023, the personal allowance is £12,570. A child can earn up to this amount without paying income tax. However, any income above the personal allowance will be subject to income tax at the appropriate rates.

If a child has income (including employment income, investment income, or rental income) that requires them to file a tax return, they or their legal guardian must register for Self Assessment with HMRC and complete a tax return each year. The process of filing a child’s tax return is similar to that of an adult, and the appropriate forms and schedules must be completed based on the child’s sources of income.

It is essential to note that if the primary purpose of employing a child and paying them a salary is to avoid tax, this arrangement could be considered tax avoidance and fall under the GAAR. The GAAR is designed to counteract tax advantages arising from abusive tax arrangements. If an arrangement is found to be abusive under GAAR, HMRC can take action to recover the lost tax, along with penalties and interest.

In summary, while it is possible to use a business to pay for a child’s education by employing them and paying a salary, ensuring that the arrangement is legitimate and not primarily aimed at avoiding the tax is essential. It is advisable to seek professional advice from a qualified accountant or tax adviser to ensure compliance with HMRC rules and regulations. You can call us to discuss your personal circumstances with our specialist tax advisors.