NIM02402 - Class 1 NICs: earnings of employees and office holders: training and similar costs: payments made by employers to earners in full-time attendance at universities and colleges

Regulation 25 and paragraph 12 of Part VII of Schedule 3 to the Social Security (Contributions) Regulations 2001

Legislation

Legislation was introduced with effect from 6 April 2005 to disregard from the calculation of earnings for Class 1 NICs purposes payments of scholarship income to an employed earner while they are receiving full-time instruction at a university, college, school or other educational establishment. The legislation broadly aligns the NICs position with the income tax exemption allowed by section 776 of the Income Tax (Trading and Other Income) Act 2005 (previously section 331 of the Income and Corporation Taxes Act 1988) supplemented by HMRC’s Statement of Practice SP4/86.

See EIM06215 and EIM06220 for guidance regarding the operation of SP4/86 for tax.

It’s important to remember that the disregard only applies to payments of scholarship income in respect of the period of instruction. Section 776 of IT(TOI)A 2005 defines “scholarship” as including a bursary, exhibition or other similar educational endowment.

Essentially, scholarship income will consist of payments from an award, usually made on merit, which do no more than support a student during a period of study.

The disregard does not apply to payments of earnings made to an employee for any periods spent working for the employer, perhaps at weekends, evenings or during the vacations. Any payment of earnings made by the employer for this work will be subject to Class 1 NICs in the normal way.

Conditions for the disregard to apply

Where an employee is released by an employer to undertake a full-time course, including a sandwich course, payments of scholarship income made to the employee for periods of attendance at the educational establishment may be disregarded from earnings for NICs purposes if certain conditions are satisfied.

Full-time instruction is not defined in the legislation, therefore, in the absence of a statutory definition, the ordinary meaning of this term should be observed. Instruction will be classed as full-time where the individual is registered as a full-time student at an educational establishment and signed up to undertake a study course as the principal activity. It may be distinguished from someone who undertakes a study course, such as on a day release, who works normally on the other days of the week.

The conditions which the employee must satisfy are:

  1. The employer requires that the employee must be enrolled at the educational establishment for at least one academic year and must attend the course for at least 20 weeks in that academic year. Or if the course is longer the employee must attend for at least 20 weeks on average, in an academic year over the period of the course.
  2. The educational establishment must be a recognised university, technical college or similar educational establishment which is open to members of the public generally and must offer more than one course of practical or academic instruction. The establishment must not be run by the employer or trade organisation.
  3. For courses that commenced on or after 1 September 2007, the payments, including lodging, subsistence and travelling allowances, but excluding any tuition fees payable by the employee to the university, must not have exceed £15,480 for the academic year.

If the payment of scholarship income exceeds £15,480 in the academic year the disregard will not apply to any part of the payment and Class 1 NICs will be correctly due and payable on the whole amount.

Example 1

Sue’s employer pays for her to attend college. The course starts in September 2022 and finishes at the end of their academic year in June 2023. During this period she has holidays in December and March when she works for her employer. She is paid her normal monthly salary while working for her employer during these holidays. Her income while working during her holidays is subject to Class 1 NICs, because the disregard only applies to scholarship income paid when attending college.

Sue’s employer pays her £3,300 scholarship income in September 2022 to cover the first term of the academic year and then pays two further amounts of £3,300 in January 2023 and April 2023 to cover the second and third terms. These three amounts of £3,300 are disregarded from the calculation of earnings for Class 1 NICs because they meet all the conditions including being less than the financial ceiling of £15,480.

Example 2

Sanjay’s employer pays for him to attend college. The course lasts for three years, with each of the college academic years starting in September and finishing the following June. The course starts in September 2022 and finishes June 2025. During this period he has holidays 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 holidays. His income while working during his holidays is subject to Class 1 NICs, because the disregard only applies to scholarship income when attending college.

Sanjay’s employer pays him £4,500 scholarship income in September 2022 to cover the first term of the first academic year and then pays two further amounts of £4,500 in January 2023 and April 2023 to cover the second and third terms. These 3 amounts are disregarded from the calculation of earnings for Class 1 NICs because all of the conditions are satisfied including being less than the financial ceiling of £15,480 for the 2022 to 2023 academic year.

Sanjay’s employer pays him £5,000 scholarship income in September 2022 to cover the first term of the second academic year and pays a further amount of £5,000 in January 2024 for the second term. Then in April Sanjay is paid £5,400 for the final term. The 3 amounts are also disregarded from the calculation of Class 1 NICs, because all of the conditions are satisfied including being less than the financial ceiling of £15,480 for the 2024 to 2025 academic year.

Sanjay’s employer pays him £5,000 scholarship income in September 2024 to cover the first term of the final academic year and pays a further amount of £5,000 in January 2025 for the second term. In April 2025 Sanjay’s employer increases his payment to £10,000 for the final term. As this final payment means that the total for the year exceeds the financial ceiling, then Class 1 NICs are due on all the payments made for the academic year. However, whilst Sanjay will not benefit from the disregard for the 2024 to 2025 academic year, the disregard will apply for the first 2 academic years of his course.