Keir Starmer secured a decisive Labour victory last week, becoming the UK’s new Prime Minister with a 174-seat majority. He has assembled his cabinet and, over the coming weeks and months, the new government will start putting its manifesto pledges into action.
Parents with children in private school may be wondering where this leaves them, after Starmer promised to start charging VAT on private school fees – a move which could see the average bill rise by 20%.
Starmer has previously argued that the measure is “not an attack on private schools”, but a necessary step in helping to fund reforms in the struggling state sector. He plans to use the money to recruit 6,500 new teachers and to fund over 3,000 new nurseries.
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Nevertheless, it comes at a tough time for many parents, who have already seen fees rise dramatically in recent years. The latest figures from the Independent Schools Council (ISC) reveal that fees for the 2023/2024 academic year increased by 8%, on average. This was largely driven by inflation and changes to the Teachers’ Pension Scheme.
Average day-school fees now amount to £18,063 per year. This increases to £23,925 for day pupils attending boarding schools, and £42,459 for the average boarder.
What will higher school fees mean for parents?
Research from wealth management firm Saltus suggests as many as one in four parents could pull their children out of private school thanks to the addition of VAT. One in five were already contemplating this anyway thanks to other cost increases in recent years, survey data suggests.
Jason Hollands, managing director at wealth management firm Evelyn Partners, dug into the numbers in a recent MoneyWeek article.
If average school fees rise by 5% inflation next year and 20% VAT is added, parents could be looking at annual costs of around £24,052 for the average day school student, £31,325 for the average day pupil at a boarding school, and £52,746 for the average boarder, Hollands suggests.
This is a “formidable sum” to find out of taxed income, he says. For the full analysis, see our recent article: “Can I afford to send my kids to private school?”
When would Labour introduce VAT on private school fees?
In the lead-up to the election, Chancellor Rachel Reeves said that 2025 was the earliest Labour would impose VAT on private schools. She added that the tax would not be imposed retrospectively.
“While the news offered parents some assurances that they would not be hit by a heavy bill in September this year, Reeves’ statement was vague,” says Alice Haine, personal finance analyst at Bestinvest.
Reeves confirmed the policy would be included in the post-election budget in the Autumn, with the measure passing into law in the new government’s first finance bill. However, Haine points out that it is “unclear” whether it would come into effect at the start of the new tax year (April 2025) or the start of the new academic year (September 2025).
The start of the new academic year would be better for many parents, who won’t want to pull their children out of school midway through the academic year, if they can’t afford the higher fees.
Labour has suggested schools could absorb some of the cost rather than passing it on to parents, however several schools have countered that they are run on tight margins and cannot afford to do this.
Three things to consider if you’re struggling with school fees
“Paying school fees is no picnic for parents,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “Soaring costs in recent years have already meant having to stretch their finances, and there’s a risk that if the extra expense of VAT is passed on to them, some will find it a stretch too far,” she adds.
Moving a child out of their current school at an inopportune time can prove disruptive to their education, so it is important to plan ahead if you think a change in policy could impact your ability to pay. We highlight five steps you could consider.
1. Can you reduce your fees by paying in advance?
Some schools allow you to pay in advance. This can be beneficial, as it allows you to lock fees in at their current price before any inflationary increases.
There has been an increased focus on advance payment in light of the promised VAT reforms, as VAT is traditionally applied at the point of sale. By paying fees upfront before any reforms are implemented, it is possible parents would be able to sidestep the new rules.
That said, schools have warned that Labour could change the rules to close this loophole. In other words, there are no guarantees.
2. Consider the hidden costs of moving house
According to the report from Saltus, some parents have considered moving house as a result of rising private school fees.
Some plan to relocate to a borough with better state schools, while others plan to move closer to another private school with lower fees. Downsizing is also an option, if you want to funnel the profits from selling your house into your child’s education.
However, it is important to remember that moving house comes with a heap of hidden costs. According to comparison site reallymoving, the total average cost of moving house in the UK is £14,432, when you take conveyancing costs, survey costs, estate agent fees, stamp duty, removal costs and EPC costs into consideration.
See our recent piece: “Are you better off moving house to beat Labour’s private school fees hike?”
3. Read up on inheritance tax rules if grandparents are paying
Increasingly, grandparents are getting involved in helping out with school fees. But there are some important tax rules that you should know about before making a decision.
The taxman has imposed some strict rules on gift-giving to prevent families from avoiding inheritance tax. Anyone is permitted to give away up to £3,000 in tax-free gifts each year. However, anything above this limit is classified as a "potentially-exempt transfer". In other words, it is only free from inheritance tax if the gift-giver survives for seven years after making the gift.
There are some exceptions to this. For example, "gifts from surplus income" are not subject to inheritance tax – no matter how large the amount. To qualify, the giver must be able to prove the gift has come from income rather than capital. What’s more, the gift must not impact the giver’s quality of life.
4. Find out whether your school offers any support systems or discounts
“Most schools offer discounts for siblings or staff members, and some have lower fees if you do specific jobs, such as the clergy or armed forces,” Cole explains. It’s also worth finding out whether there are any scholarships on offer, if your child excels academically or in an area like sport, art or music.
What’s more, schools often have hardship arrangements in place for families that are struggling financially.
5. If you are planning for the future, consider investing
If you don’t currently have children in private school but are planning for the future, you could consider investing some money in a stocks and shares ISA. You would need a decent time horizon ahead of you to ride out any short-term volatility, though. Coles recommends five to 10 years.
If you deposited £10,000 in a stocks and shares ISA on the day a child was born and managed to achieve an average return of 6% per annum, the investment would be worth around £19,000 by the time the child turned 11 and was ready to start secondary school.
Depending on which school your child goes to, that could help cover a year’s worth of fees.
It’s worth mentioning that you would need to use up some of your own annual ISA allowance to do this rather than opening a junior ISA in your child’s name. This is because you can only contribute £9,000 per year to a junior ISA, and the money cannot be withdrawn until the child turns 18.
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