The new Labour Government will be adding VAT to school fees from January 1 next year, which will increase the bill to parents by 20%, unless schools choose to reduce fees another way to reduce the impact of the extra tax.
Private schools have been exempt from VAT on fees for more than 50 years, but the addition from January 1, 2025, has come as a big surprise – the earliest this was expected to happen was in September 2025. This early application of VAT means parents who are part-way through paying for school fees for the coming academic year will suddenly have to find the extra funds with little time to make alternative arrangements.
John Rainsford, VAT Director at professional services and wealth management firm Evelyn Partners said: “This will be a fundamental change to a sector which has always been exempt since VAT was introduced over 50 years ago, pushing up costs and adding a further financial burden to parents. Although schools will be able to offset some of the impact by reclaiming VAT on certain costs, such as utility bills, this will be limited given most costs relate to staff.
“The knock-on impact on the added financial burden for parents and guardians will be significant, who now face an uplift for the [new] term. Many schools have been considering ways to reduce costs, such as being able to recover VAT incurred on expenditure, so that normal annual fee increases can be minimised, which might help absorb some of the added charges when VAT is added.”
What can parents do to help pay VAT on these fees?
The announcement, which was made this summer by the Government, makes it clear that any fees paid before the announcement were exempt from VAT. But any payments made since the announcement that relate to the period from January 1, 2025, will be subject to VAT.
Some schools have already indicated they will attempt to reduce fees by offsetting other costs that are subject to VAT, but the increase will not be wiped out completely.
Mr Rainsford added: “We have not yet seen any changes announced to the ‘Capital Goods Scheme’ which is used to claw back a proportion of VAT incurred on qualifying large capital projects undertaken by the school in the previous 10-year period – such as new classroom accommodation or a new library, which continued to be used post any introduction of VAT. This would require a change to a well-established VAT provision, and it is difficult to see how this would only be targeted to the education sector.”
School fees have already risen
Many private schools have already increased their fees – rises of 6-7% are not uncommon even without factoring in VAT. There was an 8% average increase in the 2023/24 academic year, with the average day school fee hitting £6,021 per term, with the average boarding fee rising by 9% to £14,153 per term, according to Evelyn Partners. This makes a yearly fee of more than £18,000 and £42,459 respectively.
Some schools plan to cut costs by exiting the Teachers’ Pension Scheme, which avoids a 5% increase in employer contributions which came in on April 1, but this would affect teacher pensions. Schools are also looking at making buildings more energy-efficient and scaling back building plans. Other schools are also planning a phased approach by applying the parents’ share of VAT over a set period, such as three years, to give families some breathing space to adjust to the extra costs.
The Government estimates the net cost of adding VAT for most schools would be 15%, and how much of this is passed on to parents will vary from school-to-school. But there are ways for parents to change how they fund school fees to boost their own coffers.
For example, if you haven’t checked that you’re not paying over the odds for your investment funds, then you could be reducing your gains. You could also invest a lump sum in an income fund to achieve a yield to make up the shortfall, and make sure any cash accounts are getting the most in interest. Each of these measures will give you a bit more cash to help fund the extra VAT.
Aside from that, you can look to cut your costs elsewhere. This could be ditching unused subscriptions, and analysing your budget more carefully to see where you can reduce costs. If all else fails, you can ask the school for help. Some will have bursaries or scholarships available to pupils, although many are means-tested.
