How to manage VAT on school fees

Private education is a top priority for many parents, but with costs already steep and climbing higher under Labour, providing the best education is becoming more challenging.

The Chancellor, Rachel Reeves, confirmed in the Autumn Budget that private schools’ charity status will be removed, introducing 20% VAT on fees from 1^st January 2025.

This extra cost is likely to put additional pressure on parents who may already be struggling with rising costs, such as their mortgage and household bills.

Here’s our rundown of what’s changing and how you can help parents manage the fee hike.

The changes

After months of speculation, Labour has confirmed it’s scrapping independent schools’ charity status and introducing VAT on fees. This measure aims to raise £1.6 billion a year to support improvements in state education, including the recruitment of 6,500 teachers.

The 20% VAT comes on top of recent fee increases. Private school fees rose by an average of 8% in the 2023/24 academic year, according to the Independent Schools Council (ISC), with average day pupil fees now at £18,063 a year, and boarding fees at £42,459. These changes come as schools are already facing rising running costs, and many parents are struggling to meet growing financial demands.

Reeves confirmed in the Budget that military families are exempt from this change given the unique challenges they face with frequent relocations.

Preparing for rising fees

Schools have been looking at ways to help parents manage the fee hike. Strategies such as absorbing some of the VAT cost or phrasing in the increase over several years can offer some relief. However, these approaches may affect your school’s ability to invest in facilities, and may not be sustainable long term.

Phil Alltoft, Commercial Lead at Novuna Consumer Finance, said: “The success of any business depends on the quality of service, and independent schools are no different. Delivering a consistently high quality of education and maintaining impressive facilities is absolutely vital. Absorbing VAT costs might feel like a good show of support to parents. However, in reality, taking the financial hit could lead to cuts in essential areas which will ultimately compromise the student experience. Parents often view school fees as an investment and are unlikely to settle for lower standards.”

Reeves confirmed that the VAT on private school fees isn’t being applied retrospectively. However, ‘anti-forestalling’ measures prevent tax avoidance. So any fees paid by parents taking advantage of advance fee payment schemes from 29 July 2024 for terms starting on or after 1 January 2025 will be subject to VAT. Some schools had already included legal disclaimers stating that they cannot be responsible for extra costs if VAT changes were to be applied retrospectively.

How you can manage the VAT hike

Supporting your school community and helping parents afford the best education can be challenging. Simply passing on the VAT cost to parents could create a significant financial burden for families, potentially impacting enrolment, so here are some potential strategies:

• Absorb some of the VAT costs: Covering some of the VAT could reduce the impact on parents already managing rising costs. Reviewing your current budget may reveal areas for potential cost-cutting, though balancing this with necessary investments in your school’s facilities may be a stretch too far.
• Reclaim VAT on eligible expenses: Check if there are school expenses for which VAT can be reclaimed. For example, VAT may be reclaimed on certain supplies and services, offsetting some of the extra cost.
• Phase in the fee rise: Gradually introducing the fee increase over several years gives parents time to adjust, and may help keep your existing student cohort.

Flexible payment options to support parents

Flexible payment options can make school fees more manageable for parents, helping them meet rising costs and reducing the risk of them withdrawing their child from private education.

Alltoft said: “Your existing cohort of parents are more likely to be able to weather the extra expense if they can spread the cost, so offering finance improves retention and could even catch the eye of new parents looking to move to a school with better payment options.

“But offering flexible finance goes far beyond balancing the books. It’s about listening to parents’ concerns and finding actionable ways to support them during what is likely to be a tough time financially. Independent schools often have a reputation for excellence, and this now must extend to the payment options available.”

Here's how flexible School Fee Finance works.

• Spread costs monthly: Offering parents the option to pay fees in monthly instalments can ease financial pressure, particularly during periods like school holidays when household budgets may be stretched. Parents can apply online, receive an instant decision, and set up their Direct Debit in just a few minutes.
• Receive full payment upfront: While parents can spread the cost, your school receives the full amount upfront within five working days of a successful finance application. This supports your cash flow without additional administrative work, ensuring funds are available for ongoing investment in facilities. Moreover, if a parent defaults on repayment, your school isn’t liable for the unpaid balance.
• Reducing administrative burden: Your school won’t need to manage extra paperwork or processes, as finance options are managed by parents themselves online. This reduces the time your team spends on fee collection, allowing them to focus on providing the best education.

However, it’s worth noting that borrowing for school fees is likely to be more expensive for parents in the long term than paying in cash or saving in advance. The cost of interest charges could add up over time for parents who plan to keep their children in private education for many years.

Alternative options

For parents seeking ways to cover school fees without relying on loans, cutting back on expenses and saving into a top-paying account may be a possibility. If parents start saving for their child’s education early, investing could provide sufficient long-term growth to cover future fees, although the value of their investments can fall as well as rise. Support from family members, such as contributions from grandparents, may also be an option to reduce the financial burden.

Looking forward

With changes to private school fees in the Autumn Budget, offering parents a range of options can help them to feel supported and ease their financial burden. Balancing this support with the long-term financial health of your school is key, ensuring you can continue to offer high standards while remaining accessible to families committed to private education.