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VAT

How to mitigate the impact of VAT on school fees

RJP LLP By RJP LLP
How to mitigate the impact of VAT on school fees

The fees to attend a private school are on average £15,200 per annum and records show that approximately 620,000 children currently attend an independent school. This represents 5.9% of the total number of school children in the UK.

One of the most controversial manifesto policies to be introduced by Labour is the addition of VAT on school fees. It really has divided people, many of whom appreciate that money needs to be raised, but at what cost? A January 2024 survey by Saltus of 2,000 respondents with at least £250 thousand of investable assets indicated that 26% of parents would move their children or grandchildren to a state school if VAT was added to the cost of fees.

State schools are already heavily oversubscribed and under resourced. There is an argument that when parents choose the independent sector for their children’s education, they are freeing up places for others to benefit from. Equally, as the media coverage on this topic has highlighted, a large number of the people who send their children to a private school are not incredibly wealthy, but feel obliged to do so because of the extra special educational needs provision they will receive.

Overall, whereas some of Labour’s proposed tax changes are speculative, the addition of VAT on school fees is almost inevitable by 2025. The main rate of VAT is 20% but the amount to be charged against school fees has been estimated at between 14% – 18%.

Although this article is not specifically offering tax planning advice, VAT is an aspect of tax that we write about. Readers who have children in private schools and are concerned about the potential implications of VAT being added onto school fees, should consider taking the following steps:

  • Conduct a financial review. It will be important to assess your financial situation and consider how a potential 14-20% increase in fees would impact your finances. Take a worst-case scenario and use budgeting tools to plan for different scenarios.
  • Explore options for school assistance. This may not be viable but it is worth considering whether your children’s schools can offer a bursaries, scholarships, or other financial assistance programs to help offset the increased costs. It may also be possible to pay in instalments over a longer period, to manage the fee increase.
  • Be wary of prepayment options. If it is a viable option, some parents are considering prepaying multiple years of tuition to be in credit with their fees and avoid the VAT increases. There are risks to this strategy. Firstly, rumours are persisting that the government may implement measures to prevent these arrangements. Secondly, many private schools are actually in a financially precarious position already and the threat of VAT related increases could make things worse. If the school is declared bankrupt for whatever reason and ceases to operate, you may lose your money.
  • Stay well informed. The exact policy details about the rate of VAT, policy timeframes and whether there will be exemptions have not been announced. Keep up to date with the latest developments before making final decisions. Keep in touch with the school to stay up to date with their own plans, they may be offering ways to mitigate the impact on parents.
  • Consider your long-term financial options. The addition of VAT may have an impact on the amount of money you are able to invest in savings and pensions, and it may affect affordability of higher education.
  • Explore tax-efficient savings options. It may be possible to save some money by using a Junior ISA or a bare trust to help manage education costs more efficiently. These avenues are worth considering if you have the financial means to do so.
  • Consider timings. Labour has indicated that the new policy is likely to be introduced by 2025 at the earliest. This gives some time to get prepared. If you feel you will be unable to afford the cost, consider the other schooling options available.

Remember, while this policy change may cause concern, it’s important to approach the situation calmly and strategically to make the best decisions for your family’s educational and financial future.

partners@rjp.co.uk

 

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