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HMRC internal manual

Employment Income Manual

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Employment income: scholarship income: general

Section 776 IT(TOIA) 2005 (Section 331 ICTA 1988)

Section 776 IT(TOIA) 2005 (previously Section 331 ICTA 1988) provides that income from a scholarship shall be exempt from income tax and disregarded for all income tax purposes if the holder of the scholarship is receiving full-time instruction at a university, college, school or other educational establishment.

You should always bear in mind that although the existence of Section 776 as an exempting section suggests that scholarship income of the holder of the award would otherwise be chargeable to tax, this is not necessarily the case. Payments under a scholarship, etc may well be regarded as income of the holder, in the ordinary meaning of the word. Deliberation as to whether a particular type of income is scholarship income or not and whether any exemption arises under Section 776, will normally be unnecessary if the income is not taxable in the first place.

The income could be:

  • income assessable as Savings and Investment or Trading Income (see EIM06210 and BIM65151)
  • taxable employment income (see EIM06210)
  • employment income which is exempt under Statement of Practice 4/86 if it is within the permitted limit (see EIM06235)
  • not income within any section of the Taxes Acts (see EIM06210 and ESM).

Only if you decide that the income is taxable do you need to consider whether anyexemption arises under Section 776.

In order to establish the correct position you need to consider:

  • the relationship between the payer and the recipient (see EIM06215)
  • the nature of the course being undertaken (see EIM06220)
  • whether it is full time (see EIM06225)
  • where the course is being undertaken (see EIM06230)
  • the amount of the payment (see EIM06240).

In cases of doubt or difficulty it is essential to establish the full terms and conditions relating to a particular scholarship. You will normally need to obtain a copy of any contract or agreement between the parties involved in order to do so.