Can I pay school fees through my company to reclaim the VAT and save tax?
Since the government increased VAT on private school fees to 20% (in January 2025), we’ve had lots of business owners ask us this question…
For a family paying £18,000 a year, the VAT increase means there’s an extra £3,000 to pay a year.
When a business owner faces this sort of cost increase, their instinct is: “Can my company pay this?”
This question has two parts – VAT and tax – and this article we’ll answer both!
What is the VAT treatment?
In short, the VAT on school fees can’t be reclaimed.
This is because HMRC has a strict rule about VAT meaning you can only reclaim VAT on costs that are directly related to your taxable business activity.
School fees are for your child’s education – that’s a personal and not a business cost.
Even if paying for your child’s education indirectly benefits your business (e.g. by freeing you to work) – it doesn’t matter. The education itself is not a “business input”.
Think of it like this: you can’t reclaim VAT on your weekly Tesco shop even though you need to eat to run your business. Same principle applies here.
What are my options for tax?
There are essentially two options:
- Option 1: Company pays the school fees
- Option 2: You pay the school fees
What happens if the company pays the school fees?
If a company pays the school fees for a child, then there are two tax implications…
CORPORATION TAX
School fees will NOT reduce corporation tax.
As mentioned above, school fees are a personal expense, not incurred “wholly and exclusively” for business purposes.
The school fee costs will therefore be disallowed when calculating corporation tax meaning they will NOT reduce the amount of corporation tax paid.
INCOME TAX & NATIONAL INSURANCE
If the company pays the school directly then HMRC will consider all payments as a benefit provided to the director (and family).
As such the total value of school fees paid is treated as a benefit in kind. Currently, a benefit in kind must be reported to HMRC each year, through a P11D.
Which means:
• The director pays income tax on the benefit in kind (at 20%, 40% or 45%)
• The company pays Class1A National Insurance at 15%
What happens if I pay the school fees?
Under this option the school fees are paid out of the income you earn from your company. In most cases, this will be a mix of salary and dividends.
Any dividends paid must come from after-tax profits, and you will pay dividend tax on them. Depending on your income, then the rate paid will be either 8.75%, 33.75% or 39.35%.
Option 1 v Option 2 - which pays less tax?
Let’s assume the annual school fees are £18.000 and the director has an income of £60,000 and is, therefore, a higher rate taxpayer.
Option 1 - paid by the company
Corporation Tax: n/a
Income Tax: £8,000 (£18,000 x 40%)
Class1A National Insurance: £2,700 (£18,000 x 15%)
Dividend Tax: n/a
TOTAL: £10,700
Option 2 - paid by you
Corporation Tax: n/a
Income Tax: n/a
Class1A National Insurance: n/a
Dividend Tax: £6,075 (£18,000 x 33.75%)
TOTAL: £6,075 (£4,625 cheaper)
These figures indicate that you would expect to pay more tax if the school fees were paid by the company.
"What if my company sets up a scholarship fund for my child?"
If a scholarship (or similar payment) is provided because a parent is an employee or director of the company, then it’s treated as taxable employment income of the parent under section 215 ITEPA 2003.
Simply calling it a “scholarship” doesn’t change the tax treatment as HMRC looks at the substance of the transaction, not the label.
If your company is paying because you’re the director and it’s your child, then Option 1 applies, meaning you’ll be taxed on that benefit.
"What About Employing My Child?"
This one could work – but it MUST be done properly.
You can legitimately employ your child if:
- They perform real, documented work appropriate to their age
- You pay them a commercially reasonable rate for those duties
- You follow all PAYE, National Minimum Wage, and child employment rules
- You operate a RTI payroll
- You keep contracts, job descriptions, timesheets, and payroll records
If your 16-year-old helps with admin, social media, or filing during school holidays, and you pay them, say, £2,000 for summer work, then that will probably be fine as you meet the criteria above.
The company gets a corporation tax deduction, and your child uses their income tax-free personal allowance.
This is not a backdoor to pay school fees through your company. It’s only to be used if your child is employed just like any other employee. They do genuine work for which they’re paid.
The child then has money they could contribute towards their education if they choose, but you’re not disguising fees as wages.
Summary
In short, VAT on school fees cannot be reclaimed and it is probably more tax-efficient for the school fees to be paid personally rather than being directly through the limited company.
Need some Krystal Clear clarity on school fees?
If you’d like a chat to see how we can help drop us an email to [email protected] or call one of the team on 0161 410 0020.
Disclaimer
You must take professional advice before making any decisions based on the information that you have learnt here. While every effort has been made, to make sure it is accurate it cannot be precisely tailored to your personal circumstances. This article is for general information only and no action should be taken, or refrained from, as a result of this information. Professional advice should be taken based on specific circumstances in each individual case. Whilst we endeavor to ensure that the information contained in the article is correct, no liability will be accepted by Krystal Clear Accounting which is a trading name of Kim Marlor Associates Ltd or damages of any kind arising from the contents of this communication, or for any action, inaction or decision taken as a result of using any such information.
