Income from a scholarship or bursary held by someone in full time education is exempt from Income Tax under section 776 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). Where an employer sponsors an employee on a full time course, HMRC accepts the maintenance payments as exempt scholarship income under Statement of Practice 4/86 if the enrolment, attendance and course conditions are met and the payments do not exceed £15,480 for the academic year. Pay for work done for the employer, including vacation work, stays taxable in the normal way.

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What does the scholarship exemption actually say?

Section 776(1) ITTOIA 2005 provides that no liability to Income Tax arises on income from a scholarship held by an individual in full time education at a university, college, school or other educational establishment. Section 776(3) says that a scholarship includes a bursary, exhibition or other similar educational endowment, so the label the funder uses is not decisive.

There is no statutory definition of scholarship. HMRC’s Employment Income Manual at EIM06230 says the word carries its ordinary meaning and that scholarship income will generally consist of payments from an award, usually made on merit, which does no more than support a student during a period of study. HMRC also says the person making the payment is normally best placed to say what the payment is for. Where the exemption applies, EIM06205 explains that the income is exempt and disregarded for all Income Tax purposes.

Section 776(2A) adds a separate exemption for payments made to care leavers in higher education under section 23C(5A) of the Children Act 1989 and the equivalent Welsh provisions.

Is there any tax charge to exempt in the first place?

Before reaching for section 776, HMRC’s own guidance at EIM06210 asks whether the payment is taxable at all. Many payments to students are not. HMRC gives the example of student maintenance grants from grant awarding bodies: they are not taxable because they are not income under any part of the Taxes Acts, not because section 776 exempts them.

The manual also says that earnings from an employment and income from a scholarship are mutually exclusive. A salary paid under a contract of employment is earnings; an amount awarded and paid under a scholarship is not. If there is no office or employment, the payment cannot be employment income, although it might still be taxable as miscellaneous income if the student is paid to provide services. Students from overseas may also be affected by a double taxation agreement, which HMRC covers at DT1930.

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What counts as full time education?

EIM06235 explains that full time education takes its ordinary meaning: the course must be the person’s principal activity. It contrasts this with day release, where the employee studies one day a week and works normally on the others. Students registered full time on courses up to and including undergraduate level are normally treated as receiving full time education.

Two edge cases come up often:

  • PhD students. HMRC normally regards graduates registered full time for a PhD or equivalent as receiving full time education, because the research is subordinate to learning research methods. This still applies if they do small amounts of paid teaching or demonstrating, although that teaching pay is itself taxable.
  • Sandwich placements. During a work placement the award is usually suspended and the student is paid a salary. That salary is taxable earnings under PAYE, because the student is not in full time education during the placement.

Research awards and fellowships for people who have already completed postgraduate training are different. EIM06250 says there is usually no question of full time education, so section 776 does not apply, and any liability depends on the facts.

How are employer sponsored students treated?

Statement of Practice 4/86, reproduced at EIM06220, sets out when payments by an employer to an employee attending a full time course, including a sandwich course, are accepted as exempt. The current version applies to courses starting on or after 1 September 2007. The conditions are:

  1. The employer requires the employee to be enrolled for at least one academic year and to attend for at least 20 weeks in that academic year, or for at least 20 weeks on average across a longer course.
  2. The establishment is a recognised university, technical college or similar establishment, open to the public generally and offering more than one course of practical or academic instruction. An employer’s internal training school, or one run by a trade organisation, does not qualify.
  3. The payments, including lodging, subsistence and travelling allowances but excluding tuition fees payable by the employee to the university, do not exceed £15,480 for the academic year.

The exemption does not cover earnings paid for periods spent working for the employer, whether in vacations or otherwise. EIM06215 stresses that the Statement of Practice is an administrative easement: the exemption itself comes from section 776, and the Statement simply means HMRC accepts the payments as scholarship income without detailed enquiry. If the rate exceeds £15,480, HMRC may examine the arrangements in detail, but an increase above the limit part way through a course does not affect the exemption for payments covering the earlier part.

For National Insurance, EIM06205 points to a Class 1 disregard in regulation 25 and paragraph 12 of Part 7 of Schedule 3 to the Social Security (Contributions) Regulations 2001.

What if the employer pays the tuition fees?

Course fees are dealt with separately. Section 250 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) removes any tax charge where an employer, or a third party, pays for work related training, including related costs. EIM01210 notes that the exemption does not apply where the purpose of the payment is to reward the employee.

What does this look like in practice?

Illustration only. An employer sponsors Priya on a one year full time course at a university. She is enrolled for the academic year and attends for 30 weeks. During term she receives no salary, but her employer pays her £4,500 at the start of each of the three terms, a total of £13,500, and pays the university’s fees directly.

  • The £13,500 is within the £15,480 limit and the enrolment, attendance and establishment conditions are met, so HMRC accepts it as exempt scholarship income. No PAYE is due on it.
  • Priya works for the employer for four weeks in the summer on her normal salary. That pay is taxable earnings through PAYE.
  • If the employer had paid £6,000 a term instead, the total of £18,000 would exceed the limit. HMRC is then not bound by the Statement of Practice and may look at whether part of the payment is really salary. HMRC’s worked examples at EIM06240 follow the same pattern.

What about scholarships for an employee’s children?

Section 215 ITEPA 2003 limits the section 776 exemption to the scholarship holder. If the scholarship is an employment related benefit, the holder is not taxed, but the parent can be. Under section 212, a scholarship for a member of an employee’s family or household is treated as provided by reason of the employment if it is provided under arrangements entered into by the employer or a person connected with the employer, whether or not they contribute to the cost. EIM06245 says this will usually be taxed as the parent’s earnings under the benefits code, which is reported in the same way as other benefits in kind.

There are two exceptions. Section 212(3) excludes arrangements made by an individual employer in the normal course of domestic, family or personal relationships. Section 213 excludes a scholarship from a trust fund or scheme for a full time student where the award would not otherwise be linked to the employment and no more than 25% of the fund’s payments to full time students in the tax year are attributable to scholarships provided by reason of someone’s employment. Where a trust fund scholarship is taxable, section 214 measures the benefit as the total payments made from the fund to the holder.

What mistakes do employers and students make?

  • Calling ordinary salary a bursary. EIM06230 says regular salary or wages paid under an existing contract of employment are not scholarship income.
  • Treating vacation pay as exempt. Statement of Practice 4/86 expressly excludes earnings for periods spent working for the employer.
  • Applying the exemption to day release or part time study. The student must be in full time education.
  • Writing off a training loan and calling it a scholarship. EIM06230 says loans released or written off do not normally qualify as scholarship income.
  • Ignoring the parent’s position. A scholarship that is tax free for the child can still be a taxable benefit for the employee parent.
  • Using an internal academy. Courses at an employer’s own training school fail the establishment condition, even if they are intensive and full time.

Students who also earn from part time or summer work are taxed on those wages in the usual way; see tax for students with part time and summer jobs and, if the employer uses the wrong code, how PAYE tax codes work. Payments for services provided on a self employed basis may fall within the £1,000 trading allowance.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.