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.
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 £1,000 dividend allowance (reducing to £500 from April 2024) and their children’s lower rate tax bands.
- Many university students like to preserve a bedroom at home, and rent-a-room relief of £7,500 per annum can be tax-free for this room.
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 issue new shares to themselves in a different class than their existing shares.
- They gift the new shares to David and claim holdover relief to avoid paying any capital gains tax.
- 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 uni and £6,000 for his food and bills.
David has no other taxable income and must pay £519 tax at 8.75% on his dividends after deducting £12,570 for his tax-free allowance and £1,000 for his dividend allowance.
This arrangement saves David’s parents from paying £6,581 at a 33.75% higher tax rate. The rental income of £7,500 is effectively tax-free income from their company.
Children Under 18
For children under the age of 18, this arrangement will not work due to the settlement legislation.
Grandparents can provide for a grandchild or great-grandchild under 18 using an educational trust arrangement.
Reckless young adults 18-25
For young adults up to age 25 who may be considered reckless with their finances, a trust can be established with parents as trustees to control their children’s dividends to ensure they are spent as intended.
Employing your children
For children interested in working in the business, further corporation tax savings can be obtained by adding them to the company payroll.
