Private school fees: are you ready for the VAT hike in January?
Private school fees could soar this January after Labour confirmed plans to apply 20% VAT and remove business rates relief
Many families have had to tighten their purse strings in recent years thanks to high inflation and soaring mortgage costs. As we approach the new year, parents with children in private school are bracing for their annual outgoings to rise even further.
It comes after Labour announced plans to end the VAT exemption on private school fees from 1 January 2025. The policy was a key promise in the Labour manifesto, with prime minister Keir Starmer promising to use the funds to recruit 6,500 new teachers into the state sector. The government is expected to re-confirm the policy in its Budget on 30 October, before bringing it into legislation in the Finance Bill.
Parents with children in private school are now scrambling to reorganise their finances, as fees could soar by as much as 20% once the policy kicks in. For many families, this will mean a double-whammy of fee hikes in the 2024/25 academic year, as school fees almost always go up at the start of term in September.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Eton College, one of the most high-profile independent schools in England, has already written to parents to say annual fees are likely to increase from £52,749 to around £63,000, according to a BBC report. But it isn’t families at schools like Eton who will be priced out, critics of the policy suggest. Smaller schools serving less affluent families are the ones that are likely to suffer the most. Some have warned the policy could even put them out of business.
Last month, wealth management firm Saltus found that as many as one in eight parents with children at private school are planning to move them to a state school this academic year thanks to the addition of VAT. Schools could be starting to experience the effects of this already ahead of the planned hike in January. A recent survey from the Independent Schools Council (ISC) revealed a 1.7% drop in pupil numbers since the start of this academic year, with this rising to 4.6% among Year Seven pupils.
Responding to the survey’s findings, ISC chief executive Julie Robinson said: “This data couldn’t be clearer – parents are already removing their children from independent schools as a result of the government’s plans to charge parents VAT. This is just the tip of the iceberg and the knock-on effect on schools is significant, with many small schools already at risk of closure.”
This has raised questions about whether state schools have enough spaces to cope with the potential influx of former private school pupils. Many families are also pushing for clarity on what measures will be introduced to support pupils with special educational needs and disabilities, particularly where there isn’t sufficient provision in the state system.
Prime minister Keir Starmer has previously said the VAT policy is “not an attack on private schools”, but an attempt to make improvements in the struggling state sector. Speaking at the Labour party conference last month, chancellor Rachel Reeves added: “It is the fair choice, the responsible choice, the Labour choice to support the 94% of children in our state schools.”
So, how can you ready yourself for potential school fee hikes? We’ve explained what you need to consider now ahead of the January 2025 changes.
How much does private school cost?
ISC data shows that the average day school charges around £18,000 per year. This increases to around £24,000 for day pupils attending boarding schools, and around £42,500 for the average boarder.
Fees have risen considerably in recent years. In the 2023/24 academic year, costs went up by 8% on average. This was largely driven by inflation and changes to the Teachers’ Pension Scheme.
Previous fee hikes pale in comparison to the increase parents could face this January, though. If schools pass the full 20% on to parents, average day school fees could soar to almost £21,700. Finding that amount of money out of post-tax income (and after all other expenses are accounted for) will be no easy task.
The government has previously argued that schools could absorb some of the cost rather than passing it on to parents. However, several have countered that they are run on tight margins and cannot afford to do this.
“Although schools will be able to offset some of the impact by reclaiming VAT on certain costs, such as utility bills, this will be limited given the majority of costs relate to staff,” says John Rainsford, VAT director at professional services and wealth management firm Evelyn Partners.
It is not just the application of VAT that will push fees higher this year either – the government has also announced plans to end business rates relief for private schools. Under current rules, around 50% of private schools are registered as charitable institutions, meaning they are entitled to an 80% discount on this tax. Some local authorities top this up to 100%. But this tax perk is also set to come to an end on 1 January.
Four things to consider if you’re struggling with school fees
Before the government unveiled further details on the policy after its July spending audit, some parents were hoping to get around the VAT hike by paying their children’s school fees in advance. However, the government has now closed this loophole by introducing anti-forestalling legislation.
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. Here are four key considerations.
1. Consider the hidden costs of moving house
According to Saltus, some parents have considered moving house as a result of higher private school fees. Some plan to relocate to a local authority area with better state schools, while others plan to move closer to another private school that has 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 include conveyancing costs, survey costs, estate agent fees, stamp duty, removal costs and EPC costs.
It is important that you take this into consideration when weighing up any savings, as this sum could go a decent way to covering a year’s worth of fees. For further analysis, see our recent piece: “Are you better off moving house to beat Labour’s private school fees hike?”
2. 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.
Even if the grandparent pays the grandchild’s school fees directly rather than passing the money over to the child’s parents, the rules around potentially-exempt transfers still apply.
There are some exceptions. For example, "gifts from surplus income" are not subject to inheritance tax, no matter how large the amount. But to qualify, the gift-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.
3. Find out whether your school offers any support systems or discounts
Some schools offer discounts for siblings and the children of staff members. You might also qualify if you work in a particular job, such as the clergy or armed forces. Another thing that’s worth finding out is whether there are any scholarships on offer. You may be able to access one if your child excels academically or in an area like sport, art or music.
For families that are struggling, there are sometimes hardship arrangements and bursaries that might be of assistance. However, as one MoneyWeek reader recently pointed out, scholarships and bursaries could be one of the first things to be cut by schools once the government introduces VAT. This is because they are subsidised by money from fee-paying parents.
4. 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 – ideally 5-10 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 could be worth around £19,000 by the time the child turns 11, which is secondary school age. This sum wouldn’t be make-or-break in deciding whether you could afford to pay for a private education, but it could cover around 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.
If you want a different investment vehicle where the child is the named beneficiary, you could consider a bare trust. However, the tax rules are more complex on these – particularly if it is a parent paying money into the trust rather than a grandparent. It is worth speaking to a financial adviser before looking into this route.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.
Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.
Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.
Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.
-
How to invest in nuclear power
We need nuclear power to go green, says Dominic Frisby. But there is a better option than huge power stations
By Dominic Frisby Published
-
Chase slashes its easy-access savings rate – is it time to switch?
The Chase easy-access savings account has proved popular with savers thanks to its competitive rate and bonus deals. But, as the rate has dropped, has it lost its charm?
By Katie Williams Published