The Labour government has made headlines with its decision to apply VAT on school fees, a policy shift designed, ultimately, to create 6,500 new teaching jobs in England.
For many families, this change has a more immediate impact: private schools are already raising fees to mitigate their losses. The extent of the fee increase very much depends on the nature of the school, but an analysis by The Telegraph puts the average rise at 6.2%.
Montgomery Charles has been advising our clients on this issue for some time now, but the accelerated timeline for this policy – which will kick in on 1 January 2025 – has still taken many by surprise. And parents hoping to pay fees in advance have also been disappointed. The Chancellor has stated that prepayments of fees for terms starting on or after 1 January made on or after 29 July 2024 will have VAT applied.
A bump in the road for those affected? Undoubtedly. But it’s also an opportunity to revisit financial strategies and explore ways to make the most of the available options.
It’s important to stay informed about these changes and consider how they might impact your own financial planning, so you can keep your focus on what really matters: giving your child the best educational experience possible.
How can you manage VAT on school fees?
Check for exemptions
These could change as we find out more about about the new legislation. But we know the following:
- Children with education, health and care plans (EHCPs) won’t be affected.
- Bursaries and other discounted fee arrangements are unlikely to be affected. This does depend on the bursary in question (for example, bursaries funded by third parties will need to be assessed on a case-by-case basis), but if a bursary covers all fees then VAT will not apply, as no cost is involved. It’s worth talking to the school directly to find out what their policies are and what’s available.
Savings and investments
Ensure you are making the most of your ISA annual allowance, which is currently £20,000 per year. ISAs come with a range of tax benefits (find out more about how they work).
You could consider a Junior ISA (Individual Savings Accounts) or Child Trust Fund, which also allow your savings to grow without being taxed – another way to build a fund specifically for education costs. The current savings limit for Junior ISAs is £9,000 a year.
Remember, though, that cash is not risk-free. Interest rates are unlikely to keep up with inflation, and the ‘actual’ value of your cash is likely to drop over time (ie, you can buy less in the future with £100 than you can buy now).
This is where stocks and shares investments come in. Over the long term, investments can offer some protection from inflation, and perhaps even grow your school fee fund further than basic interest earnings on cash.
Everyone’s situation – and tolerance to risk – is different, so it’s vital to speak to a financial adviser before taking action.
Can the grandparents help?
Often grandparents are extremely motivated to help their grandchildren through education, especially if they themselves were fortunate enough to go to private school. Not only can they help with adding to, say, Junior ISAs, but where they have more funds than they can spend in their lifetime they can create trust funds that support the children all the way through to university and beyond.
Can your limited company help?
If you, the parents, own a limited company and your parents buy some shares from you and then gift those shares to their grandchildren, those shares can pay dividends to your children. Those dividends can be offset against their personal allowance, in many cases meaning they pay no income tax or dividend tax. Please note that gifts directly to children (under the age of 18) from parents cannot be used against the child’s personal allowance.
Plan your payments wisely
VAT on school fees is usually calculated on an annual or termly basis. By planning your payments, you might find ways to reduce VAT. Some schools offer discounts for paying fees upfront or provide flexible instalment plans. It’s worth negotiating with the school to see what’s possible.
Stay updated on changes
Tax laws and school fee policies can change, so it’s a good idea to keep up with any updates. Knowing about changes in VAT rules or school policies helps you adjust your financial planning accordingly and avoid any surprises.
And finally…get advice from a financial expert to help mitigate VAT on school fees
If you’re feeling overwhelmed, consider speaking with one of our financial advisers. They can offer personalised advice, help you navigate complex tax rules, and develop a plan that suits your needs.
By choosing the right school, making the most of tax-efficient savings, exploring available reliefs, planning your payments, and seeking expert advice, you can make a difficult process smoother and more manageable.
If you would like to speak to an expert about this subject, please schedule a no-cost, no-commitment consultation with one of our financial planners.
Any money invested carries an element of risk and you are not guaranteed to get back the money you invested. This article does not constitute advice and you should consult your financial adviser prior to any action.
