Article by:
Chris Procter
Chris Procter and his team at Amber River SFIA (formerly SFIA Wealth Management) bring over 25 years of expertise in helping individuals and families achieve their financial goals. They have developed a strong reputation as specialists in school fees planning, and work closely with families to navigate the financial challenges of funding education, offering practical strategies to manage costs while safeguarding long-term financial wellbeing.
In this article, Chris gives his expert perspective on the new VAT policy on school fees, and what parents can do to prepare.
The government’s decision to remove the VAT exemption on independent school fees has left many parents concerned about the financial implications. Effective from 1st January 2025, this policy—intended to increase funding for state schools - has significantly altered the financial landscape for families investing in independent education.
This article explores the policy’s implications, potential impact on family finances, and practical strategies for financial preparation, helping parents navigate these changes.
The policy
The government’s move to impose VAT on independent school fees is part of a broader strategy to generate additional revenue, estimated at £1.7 billion annually. These funds are earmarked to improve standards in state schools.
However, a report by the Institute for Fiscal Studies warns of potential unintended consequences. The increased costs could result in an estimated 40,000 students moving from independent to state schools, potentially reducing the expected revenue by £300 million annually.
Additionally, smaller independent schools are at higher risk of closure, while larger and more established schools – such as Eton and Harrow – are expected to weather the changes more effectively.
Financial implications for parents
From 1st January 2025, independent school fees are no longer exempt from VAT. This means parents now face a 20% increase in fees, which represents a significant financial burden, especially for families already stretching their budgets.
The ISC Census Report 2023 highlighted that the average fee per child per year at independent schools is £16,656, rising to £36,000 for boarding students. With VAT now applied, this increases average fees to approximately £19,987 for day pupils and £43,200 for boarders.
For families with more than one child in independent education, the financial strain could be even more significant. This change impacts not only wealthy families but also middle-income households prioritising education over other expenses.
What are the uncertainties ahead?
While VAT has now been implemented, parents and schools are still grappling with uncertainties. Key questions include:
- Will all schools pass on the full 20% VAT cost?
- Will schools make operational changes to offset the additional cost?
Some schools might consider alternative strategies to mitigate the impact of VAT. These could include reducing operational costs, cutting back on extracurricular offerings, or targeting ultra-wealthy international students to maintain revenue levels. However, these adjustments will vary across schools, leaving families unsure of the exact fee increases they will face.
How can I prepare for VAT on school fees?
Now that VAT is in effect, here are some proactive steps parents can take to manage the increased costs:
- Exploring credit options: Some schools provide credit facilities, enabling families to spread costs over time.
- Family financial planning: Setting up trusts or reallocating assets could help you manage the increased costs. For instance, grandparents may be willing to set aside a living inheritance as a trust to support their grandchildren’s education.
- Tax efficiency: Ensuring your money is invested as tax efficiently as possible can free up additional funds.
- Increasing your income: Families may need to explore ways to boost their household income, such as returning to work or taking on additional hours.
- Budget adjustments: Families may need to prioritise essential expenses over non-essential ones, such as luxury subscriptions or second holidays.
While the introduction of VAT is a significant adjustment for many parents, staying informed about school-specific fee policies and maintaining a proactive approach to financial planning can help ease the burden.
Amber River Financial Planning
Given the complexity and financial impact of VAT on school fees, seeking expert financial advice is more important than ever.
An Amber River SFIA Financial Planner can provide tailored advice, help with cashflow forecasting, and suggest specific strategies based on individual family circumstances and financial goals.
Get in touch
If you’re worried about school fees, talk to Chris or one of his team, or set an initial appointment with an Amber River financial planner in your area. Call us on 0800 915 0000, or alternatively use our contact form here.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
