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HMRC internal manual

National Insurance Manual

HM Revenue & Customs
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Class 1 NICs: Earnings of employees and office holders: Training and similar costs: Scholarship and apprenticeship schemes at universities and technical colleges

Regulation 25 and paragraph 12 of Part 7 of Schedule 3 to the Social Security(Contributions) Regulations 2001


Legislation was introduced with effect from 6 April 2005 to exclude from earnings forClass 1 NICs purposes a payment made by an employer to an employee to support them whilethey are receiving full-time instruction at a university, college or school or othereducational establishment. The legislation aligns the NICs position with that originallypublished for tax as an administrative easement through Statement of Practice SP4/86.

See EIM06235 and EIM06237 for guidance regarding the operation of SP4/86 for tax.

It is important to remember that the exemption only applies to payments from the employerin respect of the period of instruction. If the employee does work for the employer,perhaps at weekends, evenings or during the vacations, any payment of earnings made by theemployer for this work will be subject to tax and Class 1 NICs in the normal way.

Conditions for exemption

Where an employee is released by an employer to take a full-time course, including a“sandwich” course, payments made to the employee for periods of attendance atthe educational establishment are treated as exempt from both NICs and income tax ifcertain conditions are satisfied.

The employee must:

  • be receiving full-time instruction at a university, technical college or similar educational establishment which is generally open to the public and offers more than one course of practical or academic instruction; and
  • be enrolled for at least one academic year; and
  • attend the course for at least 20 weeks in that academic year or, if the course is longer, they must attend for at least an average of 20 weeks in an academic year.

If all these conditions are satisfied the employer could pay up to £15,000 tax andNICs free for the 2005/06 academic year commencing on 1st September 2005. The level ofallowance increased to £15,480p.a. for periods from 1st September 2007 onwards to coverthe periods of study. The payment will include lodging, subsistence and travellingallowances but tuition fees will not count towards the limit. The value of the limit willbe reviewed annually.

If the employer agrees an award within the current financial limit, whether in a lump sumor instalments, the whole amount will be accepted without enquiry as being scholarshipincome. NICs (and tax) will not apply to such payments.

If the employer makes an award above the agreed annual limit of £15,480 (perhaps paidmonthly at a rate of £1,290) then HMRC will review the payments in order to determinetheir true character as either earnings or scholarship income.

This is a change from previous practice that said a payment above the given limit would beliable to NIC and tax. Guidance is now also aligned with SP4/86 and section 776 of ITTOIA2005 (Section 331 ICTA 1988)