Contractors' Questions: Can I offset studying costs against revenue?
Contractor’s Question: I’m an expat returning to the UK to do a Master’s degree, having been approved for a post-graduate loan which starts early next month.
Since the loan is very generous, and as I will have full-time student status, could I set up a limited company as director/ sole employee with a view to benefitting from salary sacrifice? This would be done in order to offset the costs of studying against company revenue. Would HMRC accept this structure for tax purposes?
Expert’s Answer: Salary sacrifice is normally used where someone has an existing salary and is able to sacrifice some of it for a ‘non-cash benefit’ that is subject to a more favourable tax and/or national insurance charge than the salary sacrificed.
You have personally contracted with the course provider for the degree course. If your new company now pays for the course for you, it has settled your debt and that is a ‘cash benefit’. That is the same as it having paid you that sum as net pay from a salary and you having paid the provider. The payment by the company would therefore be treated as net pay, which then must be grossed up for tax and national insurance. In this case, there is no net benefit to the salary sacrifice.
If you could arrange with the course provider to contract with your company (although I doubt they would allow it; it is probably too late now and may affect your entitlement to the post-graduate loan), you could save employees’ national insurance, compared with the above arrangement I outlined. But it doesn’t need a salary sacrifice to achieve that -- you don’t currently have a salary to sacrifice!
However, there isn’t any point in doing any of the above. If you were to pay yourself, from the limited company, a small salary and the rest of your income as dividends, you simply pay for the course, yourself, out of the top slice of the dividends and your effective tax rate is 20% and no national insurance cost. That is the best outcome you can achieve for a benefit that is taxable.
So, while you might want to trade through a limited company because it is a tax-efficient way to pay yourself, that should be the reason -- not trying to obtain a salary sacrifice benefit.
The expert was Graham Jenner, co-founder of Jenner & Co chartered accountants.
Editor’s Note: Autumn Statement 2016 announced a further paring back of salary sacrifices (many are due to have their tax advantages phased out from April). Tailored advice from a knowledgeable accountant should therefore be strongly considered before acting in this area.