Tax Free University Fees – Is It Possible?
With the start of the new academic year on the horizon, many students are looking forward to the next step of their education. Most will be excited to move away from home, specialise in their chosen subject, and develop new skills.
However, university fees can be a worrying prospect. £9,000 for each year of tuition is a lot of money, and then any student loans you take out are added on top of that. That’s why the family members of those students often want to try and help repay as much of these loans as possible.
The experts at our tax consultancy have answered some of the most common questions about the process.
Are Uni Fees Tax Deductible?
No, your child’s university fees are not tax deductible, however you can structure dividend payments from your business in such a way that makes them significantly more tax efficient.
Find out more below.
1. What Are The Eligibility Requirements For Using Dividends For Tax-Free University Fees?
If you are a business owner with shares in your company, you may benefit from tax savings if you choose to pay off your child’s university fees.
That’s because you can utilise your child’s Personal Allowance, which they are unlikely to use up themselves if they aren’t working, by gifting them dividends, which also come with a £1,000 Dividend Allowance for the 2023/24 tax year. That totals £13,570 of tax-free income.
Firstly, if you are the parent of the student, they must be 18 or over for you to receive any kind of benefit from this strategy. That’s because the parents or caregivers will be taxed on any dividends given to a child, which eliminates any initial benefits.
By using these dividend payments to fully pay off tuition fees in advance, avoiding Dividend Tax yourself, you could help your child save a significant amount in interest and you can reduce the amount of tax you spent on withdrawing the money from your business.
2. Are There Any Potential Risks Associated With Using Dividends For Tax-Free University Fees?
As with any financial strategy, there are some risks that you need to consider. The main concern is that in the unlikely event you are to be estranged from your child or you have an argument, you will lose control of the shares you have gifted to them.
To combat this possibility, consider opening a trust for your children and holding the shares there rather than gifting them to your children directly. That way, you still have control over those shares while your children can reap the rewards.
Plus, multiple children can go into one trust, which allows you to maintain control over all your shares from a single account, regardless of how many children you intend to help through this method.
Additionally, if you end up selling the company in the future, you will need to work closely with your children in order to decide what happens with the shares they have at that point.
3. Are There Any Specific Tax Requirements That I Should Be Aware Of?
To guarantee that your child is getting the most out of their dividends, it’s best if they do not have a part time job while studying. That way, their £12,570 Personal Allowance is not hindered at all, and you can pay off the maximum amount possible tax-free.
Ensuring that you are fully compliant within UK law is crucial, especially for a complex process such as this. To ensure that you are maximising your tax efficiency, ensure you receive plenty of personal tax advice from a qualified tax specialist, such as Edwards Accountants.
4. Can Grandparents Pay University Fees Tax Free?
No, but in a similar way to parents, you can structure dividend payments to your grandchildren tax efficiently. In fact, as a grandparent, you can pay dividends to your grandchild directly before they turn 18, which the parents of the child are unable to do in the same way while still receiving the same benefit.
You will be liable to pay any Capital Gains Tax on the gift, but it is your grandchild who will be taxed on any dividends received, not their parents.
However, if you choose to use a trust, there is a Capital Gains Tax relief available which would mean that no tax is payable.
These gifts could also help reduce the value of your estate for Inheritance Tax!
Complex Tax Issues Require a Helping Hand
Taxes and dividends are complicated topics. Our experts will help you navigate the complexities of tax management while ensuring you and your family achieve your goals as effectively as possible.
Get in touch with a member of our team to start your journey to better financial management today!