Families with children in private school may have to start paying VAT on school fees from January 2025 – earlier than previously expected.
In the lead-up to the general election, Labour promised to end tax breaks for private schools to help fund improvements to the state sector. The new government reiterated its commitment to the policy in the King’s Speech last week.
Previously, it was widely believed that these measures could come into effect from April 2025, the start of the new tax year, or September 2025, the start of a new school year.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues 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
However, senior Whitehall sources have now told The Times that the government is preparing to introduce the changes “as soon as possible” and that they could come into effect as soon as January.
The source also said: “This was a manifesto commitment and we have been clear that the change would be included in our first Budget”.
Chancellor Rachel Reeves has indicated she could deliver her first Budget as early as September. Any measures announced in the Budget will become law once the subsequent Finance Bill is passed.
Responding to the latest developments, Julie Robinson, chief executive of the Independent Schools Council (ISC), told MoneyWeek: “Families will have made choices about education months before an election was called; they cannot adequately plan for their children’s futures based on speculation, uncertainty and the possibility of in-year fee rises.”
She added that there is still a need for “urgent clarification” on the implications for children from military families, faith schools, and those with special educational needs and disabilities who don’t have an education, health and care plan.
Many families in these groups rely on independent schools for their children’s education, if their needs cannot be met in the state sector.
What does this mean for parents?
Once the VAT exemption is lifted, parents could see fees hiked up by to 20%. This increase would come on top of any other, inflation-related increases.
Data from the ISC revealed fees already went up by 8% on average in the 2023/2024 academic year. The average day school now charges £18,063 per year.
Even if we assume a more modest fee increase for the 2024/2025 academic year, say 5%, the average day school fee could soar to almost £23,000 per year once the 20% VAT is added as well.
Fees are typically reviewed by schools on an annual basis, with changes coming into effect in September. If the Labour government introduces VAT from January, that would mean two separate fee hikes next academic year.
The government has previously suggested 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.
Prime Minister Keir Starmer has previously said that the measure is “not an attack on private schools”, and that the Labour government plans to use the proceeds to fund 6,500 new teachers for the state sector.
However, critics have countered that many parents will be forced to remove their children from their current school as higher fees will price them out, reducing the amount of tax revenue the government is able to collect.
“Even before the prospect of VAT being imposed emerged, rising school fees have been causing many parents to think twice about sending their children to private school,” says Gary Smith, partner in financial planning at wealth management firm Evelyn Partners.
He adds that a 20% hike would be a “final deal-breaker for many thousands of families”, adding that a recent survey suggested as many as 42% of children could be pulled out of their current school and moved into the state system over the next five years.
Can you cut your bill and pay less on private school fees?
Some schools allow you to pay in advance. This can be beneficial for parents, as it allows them 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 promised VAT reforms, as VAT is traditionally applied at the point of sale. By paying fees up front before any reforms are implemented, it is possible that parents will be able to sidestep the new rules.
That said, schools have warned that the government could change the rules to close this loophole. We looked at the pros and cons of prepayment in a recent piece.
With the government’s VAT reforms potentially coming sooner rather than later, many families will be weighing up their options over the coming months – whether that means changing schools, moving house, or asking grandparents for help.
We take a closer look at the routes you can consider in “Private school fees: how to plan financially”.
It is also worth reading up on the discounts, scholarships and bursaries on offer at your school, if you think your child could qualify.
Monzo launches 11 ETFs via Blackrock to help savers invest
'North Sea oil is ripe for a rebound'
