Will Labour tax private schools? How to pay the fees

Private school fees for the 2023/24 academic year increased on average by 8% from the previous year¹.

Opinion polls and past local elections suggest that Labour is likely to win the July 2024 General Election. However, the outcome is not guaranteed.

Their plans for private school fees have not been fully outlined but it has been suggested that Labour will remove the charity status from independent schools. This would lead to 20% VAT being added to fees.

It seems unlikely that most private schools will be willing or able to absorb this entire cost. Against the background of cost-of-living increases, expensive mortgages and the general 8% rise, this potential additional increase to fees is likely to cause many parents to rethink sending their child to an independent school.

There’s a degree of uncertainty about what shape a VAT imposition would take, how much scope schools might have to mitigate it, and what price increase will be passed on to parents.

Many independent schools allow parents to pre-pay tuition for the following year at the current rate. Normally, VAT is charged at the time of invoice, but there are concerns that Labour could apply the increase retrospectively. This would mean that the pay-in-advance option could be closed off and some schools are now carrying legal disclaimers that they cannot be held responsible if the changes are imposed retroactively.

Despite the ever-growing costs, many people still see the potential benefits of providing a child with a private education. Although it’s a long-term, expensive commitment, with effective planning it is possible to pay private school fees and budget for increases.

Discuss who is going to foot the bill

Aunts, uncles, and grandparents often help pay school fees along with other family members. By providing this financial assistance, they can also help to mitigate their own future inheritance tax liability.

Anyone who pays towards a child's school fees can classify the payments as regular gifts from surplus income. As long as these ‘gifts’ do not affect their own lifestyle, they are exempt from inheritance tax.

Many parents also want to fund their child’s education themselves. We often see clients with a small child or baby on the way coming to us for suggestions on how to fund the cost of their education. Their salary may well increase over time, but it’s difficult to predict the amount or frequency of these raises. They need to establish how they will continue to make the payments, as this is likely to be combined with ongoing fee increases.

Make sure you will have enough money

It can be difficult to predict exactly how much money you will have in the future and how much private school fees will rise to. But with the help of a financial planner and cashflow modelling, you can make reasonable and educated assumptions to see if you have enough money to make the payments.

Cashflow modelling software helps to analyse your income, expenses, savings and assets

A financial planner can then consider your future goals, such as paying for a child’s education, and create a projection of your finances.

Financial planners can use available statistics to estimate future school fees costs. They can even include the potential VAT addition as part of this exercise, while also taking inflation and investment growth into account. A financial planner will then assess the fees in conjunction with your current financial situation to predict how much you can afford to pay and for how long.

Consider using a trust

After determining if you can afford private school fees, you need to think about how you will make the payments. To fund the fees long-term, investment growth might be required. It is, however, important to remember that with any investment you might receive back less than you pay in.

A simple option is to set up a bare trust on behalf of the child. This means you, or other family members, ‘gift’ the money to the child, but you have full control over the assets and where they are invested until the child is aged 18. With professional advice, these trusts are straightforward and cost-effective.

Bare trusts established on behalf of a child are tax-efficient too. The beneficiary (the child) owns the trust assets and these are taxed as if they owned them directly. This means that you can use the child’s income tax and capital gains tax allowances. These allowances are typically available in full for children because they do not usually have other taxable income.

Investments in a bare trust for a child can be highly tax-efficient. The income generated would only be taxed if it exceeds the child's personal allowance, personal savings allowance, or dividend allowance.

Please note, the rules surrounding tax allowances are correct at the time of publishing and could change.

Access your pension to fund fees

You can withdraw 25% of your pension value as a tax-free lump sum after age 55 (increasing to 57 in 2028). You could consider putting this money towards a private education.

Also, this could be particularly tax-efficient if you are a higher or additional rate taxpayer. By withdrawing this lump sum (also known as the pension commencement lump sum), you will not have any further tax to pay and the remaining 75% could be used to fund your retirement.

Although withdrawing a tax-free lump sum from your pension can be an effective way to pay for school fees, it’s important to remember that this could have a significant impact on your overall level of retirement income. A financial planner will be able to tell you if making this withdrawal is a viable option.

The bottom line for most people sending or wanting to send a child to a private school is that they should budget for the VAT rise as if they will have to pay it in full, along with well as general fee increases and inflation.

Our financial planners can help with questions about paying for a child's education and creating plans to cover costs. To find out more, book a free initial consultation or call us on 020 7189 2400.

¹Source: ISC census and annual report 2023