Private school fees soar and VAT threat looms – what does it mean for you?

One in four parents could pull their child out of private school, thanks to rising fees and the threat of VAT. Before you remortgage, move house or look to grandparents for help, here’s what you need to know.

Group of schoolgirls aged 5-7 walk down the street wearing school uniform and straw boater hats.
(Image credit: Yellow Dog Productions via Getty Images)

Private school fees have skyrocketed in recent years – and they could rise further under a Labour government

Labour has been talking about introducing VAT on private school fees for some time; Keir Starmer formalised this promise yesterday as one of his six pre-election pledges. 

The party plans to recruit 6,500 new teachers into the public sector, funding this by ending the tax breaks currently enjoyed by independent schools. 

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A general election has not yet been called, but the latest it can take place is January 2025. A Labour victory is looking increasingly likely, with Starmer’s party 30 points ahead of the Conservatives in the polls, according to a recent YouGov poll for the Times.

Starmer has previously said this measure is not an “attack on private schools”, but a move to help fund improvements to the struggling state system. 

However, it comes at a tricky time for many households. Private school fees have risen in tandem with inflation over the past few years, and have now become an unaffordable burden for many families. 

As parents also grapple with higher mortgage rates, energy bills and weekly food costs, more than one in five are now considering moving their child from their current school. If VAT is added to school fees, this figure increases to one in four parents. That’s according to data from the latest Saltus Wealth Index report, which surveys 2,000 people with investable assets of more than £250,000.

Private education has long been a controversial topic. Those on one side of the argument point out that it supports and deepens educational inequality, while those on the other side see it as a sticking plaster in an imperfect system. 

Whatever your ideological views on the topic, if you don’t have access to good state schools in your borough, it is possible you have considered private school for your child. The Independent Schools Council (ISC) estimates that around 620,000 children are currently privately educated in the UK, representing around 5.9% of the school-age population.

With fees now considerably higher than they were – and with the threat of VAT looming – many parents are taking drastic steps to free up more of their finances. Some are remortgaging, taking out loans, or relocating to a new borough with better state schools. Others are calling in a favour at the 'Bank of Grandma and Grandad'. 

Before you make any big financial decisions, there are some important things you need to know. We look at the latest policy developments, before sharing four tips for those struggling with higher school fees.

How much does private school cost?

The latest census from the ISC, published on 17 May, reveals that private school fees amount to £18,063 per year for the average day-school student. Of course, this figure varies depending on the school and region of the country. It can also vary depending on the age of the child. 

Assuming you send your child to private school between the ages of 11 and 18, you are probably looking at a bill in the region of £126,000. Fewer parents send their child to a private primary school, but if they start aged four, the bill will be closer to £253,000. And if you have more than one child, the cost will only multiply.

Inflation has been driving a sharp increase in educational costs. School fees for the 2023/2024 academic year increased by 8% on average, compared to the previous year. The good news for parents is that inflation is now coming under control. However, the VAT threat poses a big worry.

Will Labour introduce VAT on private school fees?

Private school fees are currently exempt from 20% VAT. However, Labour has now confirmed it will get rid of this tax break if it wins the next general election. 

The Institute for Fiscal Studies (IFS) estimates this could raise £1.6 billion in tax revenues. “With a small movement of pupils into the state sector, costing perhaps £100-300 million a year, this would lead to a net gain to the public finances of £1.3-1.5 billion,” the independent think tank adds. 

However, other research suggests the private sector could see a bigger exodus than this. According to the latest Saltus report, parents are already struggling to afford rising school fees, even before any VAT is added. 

One in five say they will need to pull their child out of private education thanks to inflated costs, while one in four say they will need to take on additional borrowing to cover the fees. Meanwhile, one in ten say they will need to turn to family and friends to cover the shortfall. 

When the cost of VAT is factored in, this increases further to one in four parents pulling their child out of private school. 

Julie Robinson, chief executive for the ISC, argues that charging VAT would have “the greatest impact on the families who work the hardest to pay the fees” – those who have lower incomes but “sacrifice other spending”. 

In a conversation with the BBC’s Nick Robinson last year, Starmer suggested that schools could absorb the cost increase rather than passing it on to parents in fees. However, critics have said that smaller private schools in particular are run on tight margins. 

“It is unlikely that most private schools will be willing or able to absorb the entire cost of VAT being introduced on fees,” says Carl Green, financial planning director at wealth management firm Evelyn Partners.

“Some of our clients have already received notification from their children’s schools that some or all of any VAT imposition would be added to fees on top of any customary annual rise,” he adds. 

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 your financial situation has changed. We highlight the key factors to bear in mind.

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 potential VAT reforms. However, there are some important factors for parents to bear in mind. 

“VAT is traditionally charged at the time of invoice, [so] some schools are marketing advance payment as a potential way for parents to avoid large cost increases,” says Green. However, this solution might not be as good as it looks on the tin.

“There are some concerns that if a new government were to legislate retrospectively then schools could find that avenue closed off, and parents should check the clause of pay-in-advance deals to see if they would be liable for VAT under these circumstances,” Green says.

He points out that many schools have introduced legal disclaimers to clarify that they cannot be held responsible if this happens. 

2. Think carefully before remortgaging

Some parents who are struggling with higher fees consider remortgaging their house to fund their children’s education. However, mortgage rates have skyrocketed over the past couple of years as the Bank of England hiked interest rates in an attempt to control inflation. 

The average two-year fixed residential mortgage rate is currently 5.93%. Meanwhile, the average five-year rate is 5.50%, according to the latest data from Moneyfacts. 

Imagine your child has five years of school left, and you remortgage your house to cover the full amount:

  • Average annual school fee: £18,063
  • Cost of five years of schooling: £90,315

If mortgage rates were to stay at around 5% for the full period, this is roughly how much it would cost you to repay the loan in full over a range of different terms. The figures show the cost of repaying the principal sum plus interest, and have been calculated using HSBC’s mortgage repayment calculator:

  • 10-year repayment period: £114,952 (monthly repayments of £958)
  • 15-year repayment period: £128,557 (monthly repayments of £714)
  • 20-year repayment period: £143,049 (monthly repayments of £596)
  • 25-year repayment period: £158,392 (monthly repayments of £528)

While mortgage rates are likely to fall from their current level once the Bank of England starts cutting the base rate later this year, the lowest they have been over the past 25 years is 3.59% (September 2021), according to Mortgageable. Meanwhile, the long-term average between 1995 and 2022 is higher than you might think, at 5.62%. 

Remortgaging the family home will allow you to spread the cost of school fees over a longer time horizon – but you should think carefully about whether you are willing and able to accrue hefty interest repayments.

3. 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 relocate to a borough with better state schools, while others 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. If the new property you are buying costs more than £250,000, you will need to pay stamp duty

Swipe to scroll horizontally
Property valueStamp duty land tax (SDLT) rate
Up to £250,0000%
The next £675,000 (the portion from £250,001 to £925,000)5%
The next £575,000 (the portion from £925,001 to £1.5 million)10%
The remaining amount (the portion above £1.5 million)12%

What’s more, stamp duty thresholds will be cut on 31 March 2025, meaning you will owe even more tax if you move after this date. The rules are slightly more generous for first-time buyers, so it is worth looking into this if you don’t already own a property.

You will also have to cough up for legal fees, moving fees and more. With this in mind, you should weigh up whether moving will actually save you as much money as you think.

4. 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.

Katie Williams
Staff Writer

Katie has a background in investment writing and is interested in everything to do with personal finance and financial news. 

Before joining MoneyWeek, she worked as a content writer at Invesco, a global asset management firm, which she joined as a graduate in 2019. While there, she enjoyed translating complex topics into “easy to understand” stories. 

She studied English at the University of Cambridge and loves reading, writing and going to the theatre.