VAT on private school fees: How to manage the cost

Previously, private schools didn’t have to charge VAT on their fees because of their charitable status. However, in July 2024 Chancellor Rachel Reeves announced that a 20% VAT charge on private and boarding school fees will apply from 1 January 2025.

While many schools offer advance fee payment schemes, paying in advance won’t mean you’ll avoid the VAT charge. Any fees invoiced or paid after 29 July 2024 relating to school terms after 1 January 2025 will be subject to the VAT charge at the beginning of that term.

The rising cost of private education

The introduction of VAT on private school fees compounds the rising cost of private education. Average fees for UK private day schools rose by 8% for the 2023-24 academic year to £18,064 a year, whereas boarding school fees went up by 9% to an average of £42,459 a year^[1].

Private schools are managing the VAT charge in different ways. Some are absorbing part of the VAT cost, while others plan to introduce the extra cost gradually over several years, giving parents time to financially prepare.

How to cover the VAT on private school fees

The rising cost of private school fees can place a strain on family finances. Many parents are reassessing their financial situation, particularly given the increased cost of mortgages and household bills in recent years. Here are some practical ideas to consider to help you cover the added cost.

Consider who could help with costs

Other family members, such as grandparents, might help towards school fees. They can contribute towards the cost through regular gifting from surplus income. Provided gifting this money doesn’t affect their lifestyle, they are exempt from a future inheritance tax (IHT) liability (limits apply).

Work with a financial planner

Having a financial plan that accounts for potential future fee increases can be challenging. Financial advisers can help you create a more effective plan by using cashflow modelling, which considers your current finances, spending patterns, and financial goals. This can factor in projected school fee rises, including the introduction of VAT.

Ammo Kambo, financial planner at RBC Brewin Dolphin, said: “Cashflow modelling can be used to assess whether the increase in school fees can be met from personal assets, and whether this will leave you with sufficient investments to cover your future expenditure requirements.”

Invest to cover the cost

You may want to build an investment portfolio to pay for future private school fees. However, if you’re thinking of selling investments to fund fees then you may want to seek financial or tax advice. “This could crystallise gains and therefore have possible capital gains tax consequences,” says Kambo.

“If you’re drawing down capital during volatile market conditions, then you may be forced to sell holdings at the wrong time when markets are falling, to meet expenditure requirements.”

Make use of trusts

You can hold assets in a bare trust on behalf of a child, with no limits on the amount. The money can be spent on behalf of the child before they turn 18, under limited circumstances, such as for school fees (but returns may be taxed).

A bare trust allows parents or grandparents (as trustees) to manage the investments for the child’s benefit. This option gives some control over how the funds are used, but the child can request access from the age of 18.

If money or investments are put into a bare trust by grandparents (or anyone else who isn’t the child’s parent) the contents are taxed as if they belong to the child, which may mean there is little or no tax to pay.  

However, if the contributions are made by the child’s parent, and the income from the gift exceeds £100 per year, the parent will have to pay tax on all the trust’s income until the child reaches 18 (16 in Scotland). Speak to your financial or tax adviser if you’re concerned about potential tax liabilities.

Access your pension early

If you’re aged 55 or over (rising to 57 in 2028), you’re entitled to take your pension benefits from a defined contribution pension, even if you’re still working. You could use some or all of your 25% tax-free lump sum to cover school fees, if you wish. However, withdrawing money from your pension early to cover costs may have a big impact on your future retirement income and ability to make further pension contributions.

Pension rules are complex, so speak to a financial adviser before withdrawing your retirement savings.

Seek help

With rising costs, you may be worried about the best way to cover your child’s private education, and that’s where getting financial advice can help.

A financial adviser can create a plan that’s tailored to your individual circumstances, giving you peace of mind over your family’s future finances.

[1] Independent Schools Council (ISC) Annual Census, 2024

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The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.