Private school fees: how to plan financially

Sending your child to private school is a significant financial undertaking and not one many parents enter lightly. A good deal of financial planning is required – particularly given the rate at which costs are going up. 

This topic has been in the news recently thanks to soaring private school fees and the threat of VAT. 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, but also changes to the Teachers’ Pension Scheme. 

Now, the 4 July general election is fast approaching and Labour is comfortably ahead of the Conservatives in the polls. Keir Starmer’s party has promised to end tax breaks for private schools if they win the election, using the money to fund additional teachers in the state sector. 

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School fees are currently exempt from VAT, which keeps costs down for parents. However, any change in policy under a new government could mean fees increase by up to 20%. 

We analysed the cost implications in a recent MoneyWeek article: “Can I afford to send my kids to private school?” In this piece, analysis from Jason Hollands, managing director at Evelyn Partners, revealed that even households with a six-figure salary could struggle to pay for school fees out of income. 

“Adding to this conundrum is the gradual fading away of the Baby Boomer generation, whose financial support has long facilitated private education for their descendants,” says Alexandra Loydon, director or partner engagement and consultancy at St. James’s Place. 

“As the next generation grapples with fewer financial resources, coupled with increasing life expectancy, the dilemma becomes even more acute,” she adds, pointing out that long-term financial planning becomes even more important against this backdrop.

We look at three steps parents can take to plan financially.

1. Use stocks and shares ISAs

A stocks and shares ISA is a useful investment tool. Over-18s have an annual allowance of £20,000 and you don’t have to pay any income or capital gains tax on any returns generated within the account. 

Imagine you and your partner both opened a stocks and shares ISA shortly after your child was born (each in your own name, as the rules on junior ISAs differ). Let’s also imagine you each agreed to stash an initial £5,000 in your respective accounts, investing it in a stock market tracker at an average annualised return of 8%. 

If each of you was to contribute a monthly sum of £100 thereafter, each of your pots would be worth £32,488 by the time your child was 11 and ready to start secondary school. That’s according to calculations carried out using Hargreaves Lansdown’s investment calculator.

In total, this would create a tidy pot of £64,976 – all of which is tax free. What’s more, this approach would still leave you with a decent amount of your ISA allowance to use for your own financial goals. 

The year your child was born (when you contributed the initial lump sum as well as the regular investments), each parent would still have £13,800 of their annual allowance left to use up. In a regular year, they would have £18,800 left. 

The average private day school now costs £18,063 per year in fees – although this doesn’t include extras like music classes and sports clubs. If this rate were to stay the same (which is of course unlikely given inflation), the total sum of £64,976 that you accumulated through regular saving and investing would cover around three and a half years of fees. 

Of course, that only gets you part of the way there as most children attend secondary school for seven years. There are also lunch fees, school trip fees and uniform costs to consider. If Labour wins the upcoming general election, you could see fee hikes of up to 20% as VAT is added too. 

Average annual returns of 8% aren’t guaranteed either, of course, but over a long-term investment horizon, stock markets almost always outperform cash. And having this pot can help supplement any school-related payments you are paying for out of your income.

“Diversifying an ISA portfolio with a mix of stocks, bonds, and other assets can mitigate risk and potentially yield higher returns,” says Loydon. “It's essential to start early and maintain a long-term perspective to maximise the benefits of compounding,” she adds. 

2. Set up an education trust fund

Similarly, you could consider an education trust fund. “These dedicated funds offer several advantages, including tax benefits and the ability to accumulate savings gradually,” Loydon explains. 

A trust fund is essentially a pot where you can stash money or investments on someone else’s behalf. In this instance, the beneficiary would be your child. 

As with an ISA, the earlier you start investing the more chance you have of benefitting from compound returns. Regular contributions can also help you build a sizable pot over time – and Loydon adds that this can potentially allow the use of additional tax reliefs too. 

Alternatively, grandparents may decide to open an educational trust and stash money into it to pay for their grandchildren’s education. Doing so would reduce the size of their overall estate, which could reduce the inheritance tax bill when they pass away. 

Before making any decisions on this, it is important to seek financial advice to understand whether an education trust is right for you. An advisor can also weigh up the pros and cons of different investment wrappers too – for example, would the ISA or trust route be best for you?

3. Look into scholarships, discounts and the most efficient way of paying fees 

Many schools offer the option of upfront payment. By paying for several years of school fees upfront, you can lock in a lower price before inflation – an attractive prospect if you’ve got the required cash. If you follow the ISA route outlined previously, for example, you could consider using your lump sum immediately to pay up in advance. 

Some parents will be looking into this route ahead of the general election, in case Labour wins and carries out its planned tax reforms. Paying ahead of time could allow them to circumnavigate the sharp fee hike. 

However, it is worth pointing out that a new government could legislate retrospectively to close off this loophole. Many schools offering upfront payment have introduced legal disclaimers to clarify that they cannot be held responsible if this happens. 

There are some other routes parents can go down too, though, particularly if their child has a strong academic record or if family funds are tight. “Scholarships and discounts provided by private schools can significantly alleviate the financial burden of tuition fees,” Loydon explains. 

She adds: “Many private schools offer these opportunities based on merit, financial need, or other criteria. To take advantage of these programs, it’s important to research extensively, meet eligibility requirements, and make sure the application is as strong as possible.” 

“It is also worth investigating applying directly to the school for financial aid and planning well in advance for exams and interviews that may be part of the scholarship application process.”