NIM02402 - Class 1 NICs: Earnings of employees and office holders: Training and similar costs: Scholarship and apprenticeship schemes at universities and technical colleges

Regulation 25 and paragraph 12 of Part 7 of Schedule 3 to the Social Security (Contributions) Regulations 2001

Legislation

Legislation was introduced with effect from 6 April 2005 to exclude from earnings for Class 1 NICs purposes a payment made by an employer to an employee to support them while they are receiving full-time instruction at a university, college or school or other educational establishment. The legislation aligns the NICs position with that originally published for tax as an administrative easement through Statement of Practice SP4/86.

See EIM06235 and EIM06237 for guidance regarding the operation of SP4/86 for tax.

It is important to remember that the exemption only applies to payments from the employer in respect of the period of instruction. If the employee does work for the employer, perhaps at weekends, evenings or during the vacations, any payment of earnings made by the employer for this work will be subject to tax and Class 1 NICs in the normal way.

Conditions for exemption

Where an employee is released by an employer to take a full-time course, including a “sandwich” course, payments made to the employee for periods of attendance at the educational establishment are treated as exempt from both NICs and income tax if certain conditions are satisfied.

The employee must:

• be receiving full-time instruction at a university, technical college or similar educational establishment which is generally open to the public and offers more than one course of practical or academic instruction; and
• be enrolled for at least one academic year; and
• attend the course for at least 20 weeks in that academic year or, if the course is longer, they must attend for at least an average of 20 weeks in an academic year.

If all these conditions are satisfied the employer could pay up to £15,000 tax and NICs free for the 2005/06 academic year commencing on 1st September 2005. The level of allowance increased to £15,480p.a. for periods from 1st September 2007 onwards to cover the periods of study. The payment will include lodging, subsistence and travelling allowances but tuition fees will not count towards the limit. The value of the limit will be reviewed annually.

If the employer agrees an award within the current financial limit, whether in a lump sum or instalments, the whole amount will be accepted without enquiry as being scholarship income. NICs (and tax) will not apply to such payments.

If the employer makes an award above the agreed annual limit of £15,480 (perhaps paid monthly at a rate of £1,290) then HMRC will review the payments in order to determine their true character as either earnings or scholarship income.

This is a change from previous practice that said a payment above the given limit would be liable to NIC and tax. Guidance is now also aligned with SP4/86 and section 776 of ITTOIA 2005 (Section 331 ICTA 1988)