Increased tax/NICs free limit

Applying to payments made to employees while attending full-time education courses at universities and technical colleges

Payments made by employers to employees for periods of attendance at a full-time educational course (including sandwich courses) at a recognised academic establishment may be treated, without further question, as being exempt from income tax where certain conditions are met. The relevant conditions are set out in HMRC’s Statement of Practice 4/86; “Payments Made By Employers To Employees When In Full-Time Attendance At Universities And Technical Colleges” .

One of the relevant conditions set out in the Statement of Practice is that payments in respect of an academic year (beginning on 1 September and ending on the following 31 August) must not exceed a specified financial limit. That limit has been set at £15,000 since the beginning of the 2005-06 academic year. For the 2007-08 academic year (beginning on 1 September 2007) and subsequent academic years the limit is increased to £15,480. A revised version of Statement of Practice 4/86 is published today to reflect this increase.

The increased limit will also apply for the purposes of disregarding relevant payments from the calculation of earnings for National Insurance contributions (NIC) purposes. Regulations have been made today to amend the Social Security (Contributions) Regulations 2001 to reflect the new limit.

The full revised text of Statement of Practice 4/86 is reproduced below.

“Payments made by employers to employees when in full-time attendance at universities and technical colleges (revised August 2007)

Scholarships, exhibitions, bursaries etc held by a person receiving full-time instruction at university, technical college or similar educational establishment are exempted from income tax by Section 776 ITTOIA 2005.

This Statement of Practice sets out the circumstances when payments made by an employer to an employee for periods of attendance on a full-time course (including sandwich courses) can be exempted from income tax. The following conditions and exclusion apply.

Conditions

  1. The employer requires that the employee must be enrolled at the educational establishment for at least one academic year and must attend the course for at least twenty weeks in that academic year. Or if the course is longer the employee must attend for at least twenty weeks on average, in an academic year over the period of the course.
  2. The educational establishments must be recognised universities, technical colleges or similar educational establishments, which are open to members of the public generally and offer more than one course of practical or academic instruction. For example an employer’s internal training school or one run by an employer’s trade organisation will not satisfy the educational establishment condition for the Statement of Practice.
  3. The payments, including lodging, subsistence and travelling allowances, but excluding any tuition fees payable by the employee to the university etc, do not exceed £15,480 for the 2007-08 academic year, which commences 1 September 2007.

Exclusion

  1. This exemption does not apply to payments of earnings made for any periods spent working for the employer during vacations or otherwise.

If the rate exceeds £15,480 HMRC may look at the arrangements in detail. This is because the level of payment exceeds what might reasonably be described as a scholarship or training allowance. However, an increase in the rate of payment over the qualifying limit, part way through a course, will not affect the exemption applying to any payments for the earlier part of the course.

[The current limit for the academic years ending on 31 August 2006 and 31 August 2007 has applied from 1 September 2005 and was set at £15,000. For academic years ending on or before 31 August 2005 the limit was set at £7,000 or an amount which a public awarding body such as a Research Council, would have granted to a student with similar personal circumstances. Inland Revenue Press Release, 18 November 1992 gives the details. Information for the 2005/06 academic year commencing 1 September 2005 is in Inland Revenue Budget Note 32, 16 March 2005.]”