Labour’s manifesto announced plans to charge value added tax (VAT) of 20% on private school fees.
Their aim is to use the money generated to increase spending on state schools. They’re hoping it will raise £1.5bn over the longer term to train 6,500 new teachers.
This is a divisive subject. Not all agree with the plans, just as some don’t want to send their children to fee paying schools. But, there are around 2,500 private schools educating around 7% of all pupils in the UK.
So, how could it affect your finances if you send or plan to send a child to private school?
This article isn’t personal advice. If you’re not sure if an action is right for your circumstances, ask for financial advice.
Which costs could increase and for who?
Currently private schools don’t have to charge VAT due to a legal exemption.
For many that send their children to private schools, a 20% tax will increase the costs if schools decide to reflect this is in their fees.
But there will be exemptions.
Keir Starmer’s confirmed that children with education, health and care plans (EHCPs) won’t be affected by this change. These are children with special needs who might need additional support because of those needs.
Will school fees rise to offset this tax?
This will be down to the individual school.
Schools could increase their fees to offset the VAT charge, but this might not be the full amount.
They could pick a lower amount, phase in an increase, or swallow the costs themselves. They could also charge more than the increase in VAT as other costs might rise over time as well.
Schools can still deduct VAT when buying goods and services, so this could be offset from fees too.
Can schools help with the fees?
Many schools offer scholarships for high-achieving students, but they can also offer means-tested bursaries which are based on financial need.
The level of help available will vary from school to school. Some schools might extend bursaries to cover the full fees in certain cases.
It’s worth checking with the school directly to see what assistance they have available if you’re intent on sending your children to a private school.
If there’s increased pressure on fees, more people could require this assistance, so this support could be placed under strain.
How can parents deal with increased costs?
It’s been suggested that pre-paying school fees in advance of any planned change could avoid having to pay VAT on them.
But there’s no guarantee that any rule change wouldn’t mean you had to pay the tax later if HMRC dispute this. And pre-paying in advance could cause an increased burden on parents.
One of the main things parents should do is plan ahead.
And this is sensible when dealing with any known upcoming expenditure.
Check your household budget, see what the impact of a cost increase is, and what you might need to change to make things work.
What else can help with increased costs?
Gifting
Gifts from family members, like grandparents, could help with paying school fees. And for some grandparents this could be part of an inheritance tax (IHT) planning strategy.
You can normally give away up to £3,000 per tax year inheritance tax free. This is known as the annual exemption. You can carry any unused annual exemption over to the next tax year, but if you don't use it in that year, it’s lost.
For example, if you used £2,000 of your annual exemption amount in the last tax year you could then gift £3,000 for the current tax year, and £1,000 carried over, a total of £4,000.
You can also make 'gifts out of income' free from inheritance tax. Regular payments made from excess income (which don't affect your standard of living) are normally exempt from IHT.
It’s important to keep records of gifts.
If you decide to make regular gifts out of income as part of your normal spending, you should keep a record of your after-tax income. This will show the gifts you've made are regular and you’ve enough income to cover them plus your usual day-to-day costs, without having to draw on other funds, like savings.
Both exemptions could be used to make immediate payments to a parent for education costs.
Savings
This is a time where you might want to make the most out of your cash for any upcoming spending in the next few years. And it’s important to stay ahead of inflation with your savings as it reduces the real term spending power of your money.
So, shop around for better rates than your bank can offer.
You can also take advantage of fixed-rate cash savings with potentially higher rates than easy access if you know when you might need the money. Bear in mind however, that you might not be able to access the money until its maturity date.
You could also use a Cash ISA each tax year, by saving up to the overall ISA allowance, so you don’t have to pay tax on the interest.
Active Savings service could help with all of this.
Investing
Investing over the long term increases the likelihood of positive returns compared to cash.
In fact, there’s over 100 years of data showing that for 91% of 10-year periods, investments in UK shares have done better than holding cash.
But it also shows there’s always a chance you could get back less than you invest. With investing, nothing is guaranteed and past performance is not a guide to the future.
You should make sure you have an emergency cash fund before investing, and when you do invest, it should be with the long term in mind (that’s at least five years).
Using a Stocks and Shares ISA
If you’re happy to use your own ISA allowance, you could consider using a Stocks and Shares ISA to invest.
This means there’s no UK income or capital gains tax to pay on the investments in the ISA.
You could invest initially for growth, and then switch investments to produce income at a later point or sell down investments to pay for fees.
Its important to note however, once money is withdrawn from an ISA, it will lose its ISA status.
Using bare trusts
Often used by grandparents, bare trusts allow the person making a gift, to make an irreversible gift to a trust where someone, often a child, is named as the beneficiary.
The tax usually falls upon the child, who isn’t in employment and has the same allowances as an adult, so there’s little or no tax to pay. There’s an exception if a parent pays into the trust and the income on their gift(s) exceeds £100. If this is the case all the income tax on their gift(s) would fall on them.
Unlike other children’s investment accounts, like a Junior ISA, you can withdraw money held in a bare trust before the child turns 18.
This could be for expenses a child might face while at school. For example, sports equipment, a musical instrument or residential trips. It could be possible to use money in a bare trust for school fees, although it’s a complex area so you should seek specialist advice or guidance if you’re unsure.
The benefit of tax savings will depend on your and the child's circumstances and tax rules can change over time. Investments and any income from them can go down in value as well as up, so you or the child might get back less than you invest.
Inheritance tax planning and budgeting for school fees can be complex and needs careful thought, and sometimes even professional advice.
Our financial advisers can look at the full picture to make sure you’ve got an appropriate strategy in place to help you manage your money and achieve your immediate and future goals.