If your child or grandchild attends private school, you might need to adjust your short- and long-term finances as costs could jump by around 20% if Labour moves ahead with plans to end VAT exemption.

According to the House of Lords Library, around 6–7% of children in the UK are educated in independent schools – the equivalent of around 560,000 pupils.

Fees vary significantly, but more than 7 in 10 families sending children to fee-paying schools don’t receive any type of financial support from the school. As a result, many families may benefit from considering how the VAT exemption potentially ending could affect their finances.

Read on to discover what you need to know about the proposed changes.

The Labour government proposes to introduce VAT for school fees from 1 January 2025

Payments for education and boarding services are typically exempt from VAT under the current rules. However, the Labour government outlined plans to introduce 20% VAT across the UK from 1 January 2025. It’s suggested the tax would also be applied to pre-payments of fees for terms starting on or after 1 January 2025 made since 29 July 2024.

With the cost of private education often thousands of pounds each term, introducing VAT could mean the school fees you pay jump significantly.

The government’s decision comes as it faces a black hole in public finances and is part of wider measures to increase tax revenue.

Indeed, the House of Lords report suggests the introduction of VAT could deliver a net benefit to the government of £1.3 billion to £1.5 billion.

However, others have argued that it could have the opposite effect. If the rising costs led to families deciding private education was no longer the right option for them, it could result in a net cost to the government due to the extra pupils in the state school system.

Think tank The Adam Smith Institute argues that removing VAT exemption for independent schools could end up costing the government £1.6 billion. It warned that policymakers should take into account the possibility of 15–25% of pupils leaving independent schools.

Families pulling children out of fee-paying schools could also lead to closures. A Telegraph poll found that almost three-quarters of private schools fear they would be forced to close within five years if VAT was introduced.

The average annual cost of private school could increase by £3,000

The House of Lords report suggests the average annual cost of an independent school, excluding boarding costs, was £15,200 in 2022/23. So, a 20% hike could add more than £3,000 to your outgoings.

If you have more than one child attending private school or you also pay boarding costs, your annual expenses could rise sharply if VAT is introduced.

Inflation might already mean the cost of education has risen for your family in recent years. Indeed, according to the Independent Schools Council, average fees increased by 5.6% in 2023 when compared to a year earlier. So, the addition of VAT might come at a time when you’re already reviewing the cost of private education.

Of course, private school fees vary, so it’s important to check how your budget could be affected. Some schools might also choose not to pass on the full 20% to parents if VAT is introduced.

Reviewing your finances now could help you understand whether the proposed VAT introduction could affect your short-term finances. In some cases, you might need to reduce outgoings in other areas to cover the additional costs.

As school fees typically rise as your child becomes older, you might also want to consider the effect VAT could have on your long-term outgoings as well. If your child will still be in education in five years, you may want to weigh up if investing now could create a way to pay for rising school fees.

While investment returns cannot be guaranteed, they may provide a way to grow your wealth and help cover some of the growing costs of education. It’s important to invest in a way that aligns with your goals and risk profile, which we could help you with.

As you review the cost of education, you might also want to think further ahead. For example, do you want to create a nest egg that could support your child if they pursued further education?

Many young adults find their student loan isn’t enough to cover essential outgoings when they’re at university. So, putting money aside now could allow them to focus on their course and get the most out of this chapter of their life.

Contact us to make education part of your financial plan

If private education for your children or grandchildren is a priority for you, making it part of your wider financial plan could help put your mind at ease. We could help you assess how potential increases could affect you and adjust your plan if necessary. Please get in touch to arrange a meeting.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.