How to prepare for school fee hikes
Rachel Lacey explores how parents can ready their finances for the government’s plans to impose VAT on private school fees.
29th August 2024 14:11
by Rachel Lacey from interactive investor
Share on
If you’ve got your heart set on a private education for your children – or grandchildren – you’re going to need deeper pockets than ever.
The average cost is currently £5,552 a term for a private day school, according to the Independent Schools Council. That’s more than £16,600 a year just for one child. If you want your child to board, the costs are even greater at more than £39,000 a year.
- Learn with ii: Junior SIPP vs Junior ISA | Open a Junior ISA | ISAs for Grandchildren
But those costs are likely to swell even further in the coming months. Melanie Sanderson, managing editor of The Good Schools Guide, says: “An independent education is expensive and it’s only going to get more so now a Labour government is in power and set on adding VAT to school fees. In recent years we’ve already seen annual fee increases of anywhere between four and 10%. With VAT on its way, parents can expect the cost of a private education to jump by even bigger proportions.”
The government outlined its plans in a report published in late July, which proposed: “As of 1 January 2025, all education services and vocational training supplied by a private school, or a ‘connected person’, for a charge will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.”
It added: “Any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.”
Full details of the shape these changes will take will be confirmed at the Budget held on 30 October, the report added.
While the planned increases will undoubtedly panic many parents who already have children in private school, those with younger children, do at least have some time to prepare.
Plan ahead
The earlier you start financial planning for school fees the better, says Sanderson. “Be sure to run the figures to ensure there are sufficient funds to stay the course – and don’t forget to factor in all the (not so optional) extras like uniform and sports kits, trips, equipment and even exams.”
- Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
- Should I use a Junior ISA or my own allowance when saving for my kids?
The right savings and investment strategy over the years could go a long way in helping you achieve your goal and the more time you have, the more you’ll benefit from the compounding of returns. But you will also have to think about cash-flow planning to make sure you always have the money to pay the bills – and in many cases it may make sense to take professional advice.
Using your property
If you don’t have the income or capital to pay for school fees, but you can easily afford your mortgage, borrowing against your home by remortgaging could be an option. This may be a particularly appealing option for those who have enjoyed significant house price increases in recent years.
You just need to be mindful that your repayments will go up (unless you lengthen the term) and that lenders will consider your school fees in your affordability assessment to ensure you aren’t over-stretching yourself. It’s worth talking your options through with a broker though – some lenders will have a more flexible approach to school fees than others.
They might also be able to discuss additional options with you. If you borrow a lump sum, for example, you could hold that in an offset mortgage, to reduce the amount of interest you pay on your mortgage, until you need it.
Talk to grandparents
Nobody relishes going cap in hand to their parents, but if they are well-off and exploring ways to mitigate inheritance tax (IHT), contributing to school fees, could be a win-win.
For grandparents, by gifting surplus money now, beneficiaries get its full value, rather than losing 40% to tax, if they only get it upon your death.
Each year you can take advantage of tax-free gifting allowances – beyond those lifetime gifts will be free of IHT if you survive a further seven years. Regular gifts from surplus income can be immediately free of IHT, but you will need to be able to demonstrate that your standard of living wasn’t affected as a result – meaning it’s essential you keep scrupulous records of your income and expenditure.
- Use this lesser-known trick to cut your IHT bill
- Grandparental giving: sharing your wealth and seeing the benefits
Growing numbers of grandparents are helping out with school fees. On top of the IHT benefits, many grandparents like being able to help – especially if they sent their own children to private school. Helping out with costs can also provide a useful emotional connection with their grandchildren – especially if they get to attend school concerts or sporting fixtures.
But before they make any grand gestures, its essential grandparents consider their commitment carefully. On top of their contribution, they need to think about what they would do if more grandchildren came along, for example.
Sanderson adds: “One of the dangers of making lifetime gifts is handing over money, only to regret it later in life. The key is to give away what you can afford to, when you can afford to.”
For these reasons, it’s often a good idea to get professional advice. This will help generous grandparents work out what they can afford to contribute and ensure any gifts are made in the most tax-efficient way.
Explore discounts and support
As a final step, when you’re exploring schools, it’s worth looking at whether your child could be eligible for a bursary or scholarship. According to The Good Schools Guide, roughly a third of pupils get financial support of some kind.
Sanderson says: “In 2023, UK private schools spent half a billion pounds on bursaries. Schools will have their own bursary strategy offering any number of places at a discount or fully funded. Some also offer scholarships with small fee discounts attached to those pupils showing exceptional talent in a variety of fields.”
- Back to school: time to get saving for your kid’s future
- The teenagers on track to become ISA millionaires
Scholarships might be offered to children who excel in sports, music or the arts. Bursaries, meanwhile, provide means-tested support for children who are a good fit for the school, but whose parents can’t afford the full fees.
However, while a bursary could save you thousands of pounds, you need to be prepared to have your finances and spending put under the microscope. Schools will want to see that families are deserving and that parents are making sacrifices to pay fees.
Sanderson adds: “It is not yet clear if the introduction of VAT on independent school fees will impact their scholarship and bursary offerings. What is sure, is that the picture will be different across the diverse private sector landscape. We advise parents to do their due diligence into the financial situation of all the schools they are considering and talk openly with the bursars to understand their options.”
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.