EIM06240 - Employment income: scholarship income: rates of payment under Statement of Practice 4/86: examples
Statement of Practice 4/86
Example 1
Sue’s employer encourages her to undertake training that requires Sue to attend college. The course runs for a single academic year, starting in September 2016 and finishing in June 2017. Sue takes unpaid leave of absence covering the academic year but during the vacation periods in December and March, she works for her employer.
Sue’s employer awards her a scholarship and pays her £3,300 in September 2016 to cover the first term of the academic year and then pays two further amounts of £3,300 in January 2017 and April 2017 to cover the second and third terms. These three amounts of £3,300 are exempt from tax by virtue of section 776 IT(TOI)A 2005 because all the conditions are met. As the total amount paid is less than the financial ceiling of £15,480, by virtue of SP 4/86 we do not enquire into the details of the arrangement.
She is paid at a rate equivalent to her normal salary while working for her employer during vacations. This income is subject to tax because the exemption under SP4/86 only applies to scholarship income paid when attending college.
Example 2
Sanjay’s employer pays for him to attend university. The course lasts for three years, with each of the academic years starting in September and finishing the following June. Sanjay enrols in September 2014 and graduates in June 2017. During this period he has vacations in December, March, July and August when he works for his employer. He is paid his normal monthly salary while working for his employer during the vacations. His income while working during his vacations is subject to tax, because the exemption under SP4/86 only applies to scholarship income when attending university.
Sanjay is told that he will not receive a salary during term time but his employer pays him £4,500 in September 2014 to cover the first term of the first academic year and then pays two further amounts of £4,500 in January 2015 and April 2015 for the second and third terms respectively. The employer treats all three amounts as exempt from tax by virtue of section 776 IT(TOI)A 2005 because all the conditions are met.
Sanjay’s employer pays him £5,000 in September 2015 to cover the first term of the second academic year and pays further amounts of £5,000 in January 2016 for the second term and £5,400 in April 2016 for the final term. Once again, the employer treats all three amounts as exempt from tax by virtue of section 776 IT(TOI)A 2005 because all the conditions are met.
Sanjay’s employer pays him £5,000 in September 2016 to cover the first term of the final academic year and pays a further amount of £5,000 in January 2017 for the second term. In April 2017 Sanjay’s employer pays £10,000 for the final term.
As the total amount paid in respect of each of the first two academic years is less than the financial ceiling of £15,480, by virtue of SP 4/86 we do not enquire into the details of the arrangement. However, this final payment of £10,000 takes the total amounts received in the third academic year over the £15,480 ceiling. HMRC is not bound by SP 4/86 and we may enquire into the arrangements in detail to consider the true nature of the payments made during the final academic year. It is possible that the full amount was paid under the award of a scholarship rather than an alternative reason (e.g. £5,000 of the April payment being the amount due under a company bonus scheme), but we are entitled to be satisfied that the conditions required by section 776 are met.