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EIM06205 | Employment income: scholarship income: general

From HM Revenue & Customs · Employment Income Manual

Section 776 IT(TOI)A 2005 (Section 331 ICTA 1988)

Section 776 of the Income Tax (Trading and Other Income) Act 2005 (previously Section 331 of the Income and Corporation Taxes Act 1988) provides that income from a scholarship held by an individual shall be exempt from income tax and disregarded for all income tax purposes, if the holder of the scholarship is receiving full-time education at a university, college, school or other educational establishment.

Section 776 is supplemented by HMRC’s Statement of Practice 4/86. This sets out the circumstances when payments made by an employer to an employee for periods of attendance on a full-time course will be accepted as exempt from income tax.

For Class 1 National Insurance Contributions (NICs) there is a disregard provided by Regulation 25 and paragraph 12 of Part VII of Schedule 3 to the Social Security (Contributions) Regulations 2001. Further guidance for NICs on scholarship income can be found at NIM02402.

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.

The income could be:

  • income assessable as Savings and Investment or Trading Income (see EIM06210 and BIM65151)

  • taxable employment income (see EIM06210) subject to the terms of Statement of Practice 4/86 if it is within the permitted limit (see EIM06220)

  • not income within any section of the Taxes Acts (see EIM06210 and ESM).

Deliberation as to whether a particular type of income is scholarship income or not and whether any exemption arises under Section 776 will be unnecessary if you decide that the income is not taxable in the first place. In order to establish the correct position you need to consider:

  • the relationship between the payer and the recipient (see EIM06245)

  • the nature of the payments made, i.e. are they scholarship income or payments for carrying out the duties of the employment (see EIM06230)

  • whether the education is full time (see EIM06235)

  • where the course is being undertaken (see EIM06237)

  • the amount of the payment (see EIM06225).

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