Funding for the future | School fees + VAT

If, as is currently widely expected, Labour wins the upcoming General Election on 4^th July, it hopes to raise c.£1.5bn from applying VAT to most private school fees and removing business rates relief. There is scant detail on how this will work in practice, but Shadow Chancellor Rachel Reeves has recently suggested that Labour will not seek to impose VAT on school fees until 2025, potentially allowing a reprieve while Labour’s first Finance Bill goes through Parliament.

Whatever happens, most private schools will eventually be forced to pass at least some of this additional cost onto fee paying parents, which will put additional pressure on some family budgets.

Clearly, trying to predict exactly what a new Labour Government might bring is difficult, but by discussing your circumstances and goals and making reasonable assumptions to forecast affordability, some bespoke financial planning now can help build a robust plan for meeting future school fee commitments.

Regarding the possible introduction of VAT, specifically, it is important to note that applying VAT to school fees does not necessarily mean private schools will raise their fees by the standard 20% VAT rate. The Institute for Fiscal Studies (IFS) has suggested that fees may have to rise by c.15% once recoverable VAT on schools’ costs has been accounted for, although this number will vary from one school to another.

Regardless, it is still a meaningful increase for parents to budget for, on top of an average 8% inflationary increase between the 2022/23 and 2023/24 academic years and a long track record of school fees inflation rates running higher than those of inflation more generally.

Part of building a sensible plan is to consider the ways in which you can help mitigate the rising cost of fees, including paying in advance, which can work well in certain circumstances. Much has been written about this point in the run up to the Election and many more private schools are now offering Payment In Advance (PIA) schemes for parents in light of Labour’s plans, although many private schools have established PIA schemes which they have offered for years.

Whether or not paying in advance will be entirely effective as a means of avoiding the possible VAT introduction, however, remains to be seen and is outside the scope of this article. As with anything, paying too far in advance has its own potential pitfalls.

Sensibly investing cash earmarked for future school fees to maximise returns is often an effective way to meet future commitments, as is considering cash gifts from other family members, such as Grandparents, who can make contributions to school fees as part of their own effective inheritance tax mitigation strategy.

Regardless of the outcome of the upcoming General Election, paying for child’s education is a significant outlay and for many parents a daunting prospect. Connor Broadley’s Financial Planners can help you make sense of what such a commitment might look like, in pounds and pence, and build a bespoke plan to meet your needs.