Yes, a company can pay school fees for a director’s children, but it is not a tax free way to do it. The fees are taxed on the director as earnings or as a benefit in kind, with Class 1 or Class 1A National Insurance depending on who has the contract with the school. The company can normally deduct the cost for corporation tax as part of the director’s pay, so the real question is whether this beats paying the director salary or dividends and letting them pay the school.
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How are school fees taxed when the company pays?
GOV.UK guidance on school fees for an employee’s child sets out three cases, and the answer turns on who pays and who has the contract with the school:
| Arrangement | Income tax | National Insurance |
|---|---|---|
| Director pays the school and the company reimburses | PAYE through payroll | Class 1 through payroll |
| Contract is between the director and the school, company pays the school | Report on P11D (no PAYE) | Class 1 through payroll |
| Contract is between the company and the school, company pays | Report on P11D | Class 1A |
In each case the director is taxed on the full cost. A benefit provided for a member of an employee’s family by the employer is charged on the employee (EIM20504), so it does not help that the child is the one receiving the education.
Why does the contract with the school make a difference?
Where the parent has signed the school’s terms, the fees are the parent’s debt. EIM00580 explains that when an employer pays a debt the employee owes to a third party, the payment is earnings under section 62 of the Income Tax (Earnings and Pensions) Act 2003, under what is known as the pecuniary liability principle. NIM02270 adds that this makes the payment Class 1 earnings. PAYE cannot be operated on a payment made straight to the school, so the tax is collected through the director’s tax code or Self Assessment (EIM00590).
If the company is the party contracted with the school, it is paying its own debt and providing a benefit. That takes the cost out of Class 1 and into Class 1A, which saves the employee contributions. HMRC is clear at NIM02270 that it looks at who actually entered into the contract; the name on the invoice is not enough. A company that wants the Class 1A route needs the school to agree to contract with the company, and the paperwork should show it from the start of the term in question. The wider principle is covered in what happens when a company pays a director’s bills.
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Can the company deduct the fees?
Usually, yes, if the fees are genuinely part of the director’s pay. HMRC’s Business Income Manual at BIM47107 says that where an expense linked to a director’s personal interests is taxable on the director as part of their remuneration package, the deduction should be allowed as part of the cost of employing the director. BIM47106 adds that for a controlling director whose work generates the company’s income, the level of the package is a commercial decision and a non trade purpose is unlikely.
The deduction depends on the fees being taxed as employment income. If the director’s tax is not dealt with, HMRC is likely to look again at both sides.
What if the director is a shareholder but not an employee?
Close companies face an extra rule. Section 1064 of the Corporation Tax Act 2010 treats a benefit provided for a participator as a distribution, which the company cannot deduct. Section 1065 switches this off where the benefit is taxed under Chapter 10 of Part 3 of the 2003 Act on someone employed by the company. A shareholder who is a director is an office holder and is normally taxed under the benefits code, so section 1064 does not usually apply. It can apply where the fees are paid for a shareholder with no role in the company, such as a director’s spouse who holds shares; see benefits to participators treated as distributions.
Can the fees go through the director’s loan account instead?
They can, but then they are not pay. The company is lending the director the money, and the director owes it back. Nothing is taxed as earnings while the loan is repaid on normal terms, but there is no corporation tax deduction either, and an overdrawn balance can bring a charge on the company under section 455 of the Corporation Tax Act 2010 and, once loans to the director exceed £10,000 at any time in the tax year, a beneficial loan benefit under the 2003 Act. See the director’s loan account explained. Deciding after the event which treatment applies is where most problems start, so the board should decide before the fees are paid.
Does salary sacrifice or a scholarship help?
Salary sacrifice does not. GOV.UK says that if the cost of the school fees is less than the salary given up, the employer reports the salary amount instead. HMRC’s booklet 480 confirms that transitional protection for school fees provided through optional remuneration arrangements ended no later than 6 April 2021.
Scholarships are taxed in the same way unless they are fortuitous. GOV.UK says an award is only exempt if the student is in full time education, would have received it anyway, the scholarship is run from a trust fund or scheme, and no more than 25% of the fund’s payments are for employment linked scholarships. A scholarship that a family company funds for the directors’ own children will not meet these conditions; it goes on the P11D with Class 1A.
What does it cost in practice?
Illustration only. Annual fees are £18,000, including VAT, which has applied at the standard rate of 20% to private school education since 1 January 2025. The director already earns above the upper earnings limit and pays 40% tax on any extra income. Rates are for 2026 to 2027.
| Route | Director’s tax | Director’s NI | Company NI |
|---|---|---|---|
| Company contracts with the school | £7,200 | Nil | £2,700 Class 1A |
| Director’s contract, company pays school | £7,200 | £360 (2%) | £2,700 Class 1 |
| Company reimburses the director | £7,200 | £360 (2%) | £2,700 Class 1 |
In each route the company deducts the £18,000 for corporation tax, worth £4,500 at the 25% main rate or £3,420 at the 19% small profits rate. The director still needs £7,200 of their own money to pay the tax on fees they never received as cash. Whether this beats extra salary or a dividend depends on the director’s other income; see salary versus dividends. VAT on the fees is explained in VAT on education and private school fees.
What mistakes come up most often?
- Assuming the bill’s address decides the treatment. HMRC looks at who contracted with the school.
- Returning Class 1A when the parent signed the school’s terms. That leaves Class 1 unpaid.
- Not reporting at all because the fees were booked as a company expense.
- Debiting the loan account after a year end to undo an unreported benefit.
- Forgetting payrolling. HMRC plans mandatory payrolling of most benefits in kind from April 2027, so reporting will move into the monthly payroll.
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Related Accountapedia entries
- VAT on education and private school fees
- Can my company pay into my spouse’s pension
- Paying a grandchild’s school fees: the IHT position
- Children with jobs: do they pay income tax
- Tax on director fees from an overseas company
Sources
- GOV.UK: Expenses benefits school fees for employees child
- GOV.UK: Manual page EIM20504
- GOV.UK: Manual page EIM00580
- GOV.UK: Manual page NIM02270
- GOV.UK: Manual page EIM00590
- GOV.UK: Manual page BIM47107
- GOV.UK: Manual page BIM47106
- legislation.gov.uk: Act 2010 c. 4, section 1064
- legislation.gov.uk: Act 2010 c. 4, section 1065
- GOV.UK: Legal background to expenses payments and benefits 480 chapter 1
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.