Previously, private schools didn’t have to charge VAT on their fees because of their charitable status. However, in July 2024, the UK government announced a 20% VAT charge on private and boarding school fees will apply from January 1 2025.
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Paying in advance won’t mean you’ll avoid the VAT charge. Any fees invoiced or paid after July 29 2024 relating to school terms after January 1 2025 will be subject to the VAT charge at the beginning of that term.
The rising cost of private education
This VAT introduction compounds the rising cost of private education. Average annual fees for UK private day schools rose by 8% to £18,064 for the 2023/24 academic year, whereas boarding school fees went up by 9% to an average of £42,459 a year (1).
Some private schools are absorbing part of the VAT cost, while others plan to introduce the cost over several years, giving parents time to financially prepare.
Here are some ideas that can help cover the added cost. It’s important to note that rules around investing, pensions, and tax can be complex, so you may wish to speak to a financial or tax adviser.
Who can help with costs?
Other family members can help towards school fees through regular gifting from surplus income. Provided gifting this money doesn’t affect their lifestyle, they’re exempt from a future inheritance tax (IHT) liability (limits apply).
Work with a financial planner
A financial adviser can create an effective financial 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 VAT charge. It can 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 private school fees. However, if you’re thinking of selling investments to fund fees, you may want to seek financial or tax advice as this could crystallise gains and have possible capital gains tax consequences.
Make use of trusts
You can hold assets in a bare trust on behalf of a child. The money can be spent on behalf of the child before they turn 18, under limited circumstances, such as for school fees (returns may be taxed).
A bare trust allows parents or grandparents (as trustees) to manage the investments for the child’s benefit. The child can request access from the age of 18.
If money or investments are put into a bare trust by anyone who isn’t the child’s parent, the contents are taxed as if they belong to the child, which may mean there’s little or no tax to pay.
However, if the contributions are made by the 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 turns 16.
Access your pension early
If you’re aged 55 or over, you can take your pension benefits from a defined contribution pension, even if you’re still working. You could use some or all your 25% tax-free lump sum to cover school fees. 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.
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.
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. 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.
Visit RBC Brewin Dolphin’s website today to find out more.
[1] Independent Schools Council (ISC) Annual Census, 2024
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. 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.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office; 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876