Tax saving school fee schemes aimed at dentists with a company have been marketed by accountants and tax advisers, offering the opportunity to save on taxes while covering private school fees.
These tax saving school fee schemes promise to reduce a dentist’s tax burden by over £4,000 per child annually. They involve the dentists transferring some of their shares to a family member who will receive a dividend before transferring those shares to an educational trust for their children.
The educational trust is then paid an annual dividend from the dental company, which pays for the children’s school fees.
As the educational trusts allow the dividend income to be taxed on the children, they can use their tax-free annual allowance of £12,570 each year to pay no tax on the company dividend that the parent would have normally paid tax on to fund the school fees.
These tax saving school fee schemes don’t work because of the long-established principle that only the first £100 of a child’s income can be tax-free if it comes from a parent.
Transferring shares to an educational trust through a family member violates the anti-avoidance tax laws. If the dividend originates from the parents’ company, only the initial £100 will be subject to taxation in their children’s name. In contrast, the remaining amount will be taxed in their parents’ name.
Any dentist participating in a tax-saving school fee scheme should read this article published by HMRC in June 2023, Dividend Diversion Scheme Used to Fund Education Fees (Spotlight 62), and take professional advice on the implications for their tax affairs.
The scheme can work for grandparents paying for children’s school fees only if their children are not involved within their companies.
I plan to write a comprehensive article for dentists in the future discussing why the educational tax saving school fee scheme is not tax effective for parents and why it is beneficial for grandparents.
