This article can help you fund your children’s university costs tax efficiently by using your company’s money, children’s tax allowances, and lower tax bands whilst paying into the family finances simultaneously with little or no tax to pay.
Last updated: November 2026. Tax rates and allowances change regularly and professional advice should be taken before implementing any tax planning strategy.
In summary
- Many parents support their children financially through university or gap years to develop skills before taking the next step in their education or career.
- Parents who run their own companies may consider making grown-up children shareholders take advantage of their £12,570 personal tax allowance and £500 dividend allowance together with their lower income tax bands.
- Many university students like to retain a bedroom at home. Rent-a-Room relief can allow up to £7,500 of qualifying rental income each year to be received tax-free.
Example
David is going to university in September. His tuition fees are £9,250 (covered by a student loan), his rent budget is £6,000, and his food and bills are £6,000 for the year.
To support David with his rent and bills, it could cost £12,000 a year.
David’s parents are dentists paying their taxes at higher rates and have a cash-rich dentistry company.
- They create a new class of shares with different dividend rights to their existing shares. This enables the directors to declare dividends on David’s shares independently of the main share class, allowing income to be directed to family members in a tax-efficient manner.
- They gift the new shares to David and, where available, claim holdover relief so that no immediate capital gains tax arises on the gift.
- David and his parents agree he will pay them £7,500 a year to rent his room at home, as he will still use it during holidays.
- As the directors, David’s parents declared an annual dividend to David of £19,500 to cover his university costs and home rent.
- David then pays £7,500 to his parents to rent his room in their house, £6,000 to rent his room at university and £6,000 for his food and bills.
David has no other taxable income and would pay approximately £691 of dividend tax after deducting his personal allowance and dividend allowance. This leaves almost the entire £19,500 available to fund his university living costs.
This arrangement can save a family several thousand pounds of tax compared with the parents extracting the funds personally and then giving the money to their child. The rental income of £7,500 may also qualify for Rent-a-Room relief, allowing it to be received tax-free, subject to the scheme conditions.
Care should be taken when creating alphabet shares and other bespoke share structures. The shares should carry genuine ownership rights and be properly documented. Professional advice should always be obtained before implementing this type of planning.
Warning for Children Under 18
For children under the age of 18, this type of dividend planning will usually be caught by the settlements legislation if the shares are gifted by a parent. As a result, the income may be taxed on the parent rather than the child, removing much of the tax advantage.
In some circumstances, grandparents may be able to provide for a grandchild or great-grandchild through a trust arrangement. Professional advice should always be taken before implementing any trust planning
Supporting Young Adults Aged 18-25
Not every young adult is ready to manage significant sums of money independently. Where parents wish to retain an element of oversight, a trust structure may be considered, with parents acting as trustees.
This can provide a framework for managing funds responsibly whilst ensuring money remains available for university costs, housing expenses and other intended purposes. Professional advice should be taken to ensure the arrangement is suitable and tax efficient.
Employing your children
Employing children can be tax efficient, but only where they carry out genuine work and receive a commercial rate of pay. This is often easier for practice owners than self-employed associates, as there are typically more legitimate duties available within the business.
Typical duties might include administration, marketing, social media management, stock control, filing, scanning documents, cleaning business premises or helping maintain company-owned vehicles. Any salary must be for genuine work carried out and be reasonable for the duties performed.
