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.
The VAT exemption on private school fees will come to an end on 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.
Parents with children in private schools 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, with many schools having implemented an annual hike at the start of the academic year in September.
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According to wealth management firm Saltus, more than 80,000 children could be pulled out of private school after Christmas. “Our data suggest that the addition of VAT next month will impact more than half of parents with children at private school, with 13% of children potentially moving schools between now and the summer,” says Mike Stimpson, partner at the firm.
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.
Many schools have started feeling the effects of the policy already. 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 in September, 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.”
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 £21,600. 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.
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 a 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 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.
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