Private school fees rise as VAT policy kicks in

The government’s new policy of charging VAT on private school fees kicked in on 1 January, potentially adding thousands of pounds a year to the cost of a private education.

Previously, school fees were VAT-exempt but Labour promised to change this as part of its election manifesto to fund improvements in the state sector.

Some private schools raised their fees at the start of the academic year in anticipation of the hike. This allowed them to avoid two separate fee increases within the course of the academic year, as fees are generally hiked each September to factor in rising costs.

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The government previously indicated it did not expect schools to pass on the full effect of the tax hike, suggesting fees were likely to increase by around 10% overall.

However, analysis from the Telegraph focusing on fee changes from 964 private schools in England, Scotland and Wales suggests the government has underestimated the impact of the policy.

Around half of these schools are increasing fees by 15% or more, the Telegraph says, while a fifth are increasing fees by the full 20%. For example, the famous Eton College has said it will increase its fees this month from £17,583 to £21,099.60 per term.

The Telegraph found that the average fee increase was 14%.

The government has said charging VAT on private schools will raise £1.7 billion a year by 2029/30. It has promised to use this money to recruit 6,500 new teachers and drive up standards in the state system, where 94% of children are educated.

“High and rising standards cannot just be for families who can afford them, and we must build an education system where every child can achieve and thrive,” said education secretary Bridget Phillipson.

However, critics counter that the change will impact hard-working families who make financial sacrifices elsewhere to prioritise their children’s education.

While the wealthiest families with children at top schools like Harrow and Eton might be able to absorb higher costs, those who can only just afford the fees at lesser-known schools could end up being priced out.

A survey from wealth management firm Saltus revealed that more than 80,000 children could be pulled out of private school between now and the end of the academic year.

“Our data suggests that the addition of VAT will impact more than half of parents with children at private school, with 13% of children potentially moving schools between now and the summer,” said Mike Stimpson, partner at the firm.

This has raised questions about whether state schools have enough space 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 (SEND), particularly where there isn’t sufficient provision in the state system.

Chancellor Rachel Reeves announced a £1 billion uplift in SEND funding in her Autumn Budget, however critics have suggested a large portion of this could go towards clearing deficits.

How much does private school cost?

Each year, the Independent Schools Council (ISC) publishes average fee data in its annual census. The latest report shows that fees averaged £18,000 per year for the average day school in the 2023/24 academic year.

This figure increased to around £24,000 for day pupils attending boarding schools, and to around £42,500 for the average boarder.

We can expect these figures to increase significantly when the next edition of the report is published post-VAT changes. If all schools were to pass on the full 20%, the average day school fee could increase to around £21,600.

Analysis from the Telegraph suggests most schools are hiking fees by slightly less than this – an average of 14%. Even so, this would still bring the average day school fee to £20,520.

It comes on the back of other cost increases in recent years, largely driven by inflation and changes to the Teachers’ Pension Scheme. Day school fees rose by 8% on average in the 2023/24 academic year.

Four things to consider if you’re struggling with school fees

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 the change in policy could impact your ability to pay. Here are four key considerations.

1. Consider the hidden costs of moving house

Some parents say they 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 money 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 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 now that the government has introduced 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.