- Labour’s policy to remove the VAT exemption for private schools is set to come in from January 2025
- The government estimates the net cost for most schools will be 15%
- Each school will decide how much of that additional cost they pass on to parents
- Seven ways to fund the increase in school fees
- How ditching private education for your children could generate £578,000
Laura Suter, director of personal finance at AJ Bell, comments:
“Labour has released more details on its plans for VAT on private school fees, with schools (and parents) being hit with the higher costs from January 2025. Private schools will be able to offset some of the cost increase by claiming VAT back on goods and services, with Labour estimating the net cost for most schools will be 15%. It’s up to each school how much of that cost increase they absorb and how much they pass on to parents.
“But with average day fees of £18,064 a year, even a 10% increase in fees represents a cost increase of £1,800 a year for parents. Clearly for those with two or more children in private schools this will be multiplied. Those in pricier areas of the country will face a higher bill, with the average annual fee of £22,000 in London meaning a 10% hike in fees would equate to £2,200 extra a year.
“Parents whose children board will pay even more, as Labour has confirmed VAT will also be due on boarding costs. The average cost for boarding school is £42,459, meaning an extra cost of almost £4,250 a year. But sticking with the average annual cost of £1,800 per child for day schools, how can parents plug that gap?”
- Invest in an income fund and use the yield to fund the shortfall
“If you invest a lump sum in a fund focused on generating income, you could take the income each year to plug the gap in your private school fees without touching the capital you invested. There are four UK Equity Income funds currently yielding more than 6.5%, meaning you’d need to invest £28,000 to generate enough income to cover the increase in the school bill. These ‘income maximiser’ funds tend to prioritise income over capital gains, but you may also see a bump to your initial investment over the years. You need to be careful to protect your returns from tax, so investing in an ISA would be the most tax-efficient way. However, if both parents have already exhausted their ISA allowance you’d need to factor in any tax due on your returns, and invest a higher sum to compensate.”
- Invest in a global growth fund and sell your gains each year
“Another option is to invest in a fund targeting total returns (a mixture of capital growth and income) and then sell your gains each year to fund your school fee shortfall. Over the past 10 years the Global sector has delivered annualised returns of 9.82%. This means you could invest £18,500 and, assuming you generate a return in this ballpark, you should have sufficient gains to meet your shortfall. However, it’s worth noting that investments can go down as well as up and you aren’t guaranteed to get nearly 10% total return every year from a fund in the Global sector. You’d need to sell some of your holding each year to realise your returns, and factor in the associated trading and administration costs, but it would in theory mean your original pot would be untouched. Clearly any drops in the market could mean you have to eat into your original capital to make the withdrawal each year, so you’d need to keep an eye on this and top up the pot if needed.”
- Cut your (investment) costs
“Even a small cut in your investment costs can boost your overall portfolio, meaning you can withdraw an equivalent amount to pay for the hike in school fees. By shifting from an active fund to a passive fund, opting for a multi-asset fund with a lower fee, ditching expensive old pension funds in favour of cheaper ones or cutting your platform costs, you could net a decent amount each year. Someone with a £120,000 portfolio who manages to cut costs by 0.75% a year through a mixture of the moves above could net themselves £900 a year. If both parents did this, they would have enough savings to meet the cost of the extra school fees.”
- Maximise your cash returns
“There is still £252 billion of cash sitting in accounts earning no interest, according to the Bank of England, often in current accounts or old savings accounts. If some of your cash is in this camp, you could shift it to generate a higher return and use the interest to pay your higher bill. The top easy-access savings account pays 5.2% at the moment, which means you’d need to have £35,000 in cash savings to generate sufficient interest. However, this amount will take you over your tax-free Personal Allowance and mean you have to pay tax on the savings interest. Instead, you could opt for an ISA, which has a similar top rate of 5.21% for an easy-access account, and you won’t have to pay tax on the money. As each individual only has a £20,000 ISA allowance each year, you’d need to split the £35,000 between two parents or dig out any old cash ISAs earning measly interest and move them to a higher paying account. Another factor to consider is that with Bank of England base rate cuts looming, these interest rates are likely to drop meaning you’d need a bigger savings pot to generate the same return in coming years. Another option is to go for a five-year fixed rate ISA, meaning that you know what your return will be in future years. The current top five-year ISA is 4.26%, meaning you’d need £43,000 in savings to get your desired cash target each year. Just make sure the account pays out interest annually, rather than only at maturity.”
- Ask for a pay rise
“If your costs rise, one way to meet them is to ask for an above-average pay rise. Clearly private school fees going up isn’t going to convince your boss they should pay you more, but if you can prove you are paid below market rate, have taken on more responsibility or gone above-and-beyond this year you might be able to clinch a decent raise. However, because you pay school fees after income tax and National Insurance, you’ll need an even bigger pay rise to get sufficient take-home pay to meet your higher school bill. A basic-rate taxpayer would need to earn around £2,500 a year more in their gross salary to get the required post-tax pay boost, while a higher rate taxpayer would need a £3,100 boost to their salary to get the £1,800 post-tax increase.”
- Cut your costs elsewhere
“In practice the average school fee increase equates to an extra £150 a month – so you could find that cost saving in your everyday spending. Whether it’s cutting back on your child’s sports clubs or weekend activities, cutting back on nights out or ditching some of your monthly subscriptions, you could analyse your budget and work out where to make savings.”
- Ask the school for help
“If you can’t afford the higher fees (particularly if your school passes on the full 20% hike) you could ask for help from bursaries or scholarships. Around a third of private school pupils get some help with their fees, although the level of support depends on the type of scheme and for around half of pupils is means-tested. However, schools are likely to be aware that more parents might need support and may increase their support to stop a flood of pupils leaving for the state school system.”
What if you ditch private school?
“Some parents will decide the fee increase means that private school isn’t worth it anymore – and that could prove a very financially lucrative decision. The total cost of private school from reception up to the age of 18 is £409,000 per child, based on current average annual fees of £18,064 and assuming schools pass on a 10% hike as a result of the VAT increase and that fees rise by 5% a year.
“If you put your child into state school and instead invested that money each year, earning 5% returns a year, you would have an investment pot worth £578,000 by the time they finished school. You could, of course, keep that money for yourself or hand it to your child as a very generous birthday present. That would buy two of the average UK houses outright, around 20 brand new Ford Focus cars, 82 first class return flights to Thailand or 72,250 portions of avocado on toast – covering all the bases for an 18-year-old.
“More realistically, if your child kept that money invested and it earned 5% returns a year after charges, they would be able to generate an income worth almost £29,000 a year. If some of this money had been invested in a Junior ISA for the child (up to the £9,000 limit each year) a big chunk of that income would be tax free. Some parents may decide that this is a better start in life for their child than a private education.”
Total cost of private school
