Yahoo Finance How parents can dodge Labour’s private school tax raid – and save £60,000
Now that Labour is in power, a VAT raid on private school fees could be a key policy of its government. Understandably, worried parents have been looking for ways to minimise the potential damage to their finances.
One way to potentially save more than £60,000 is for parents to pay their bills upfront before the changes come into effect.
Labour has said it will introduce “anti-forestalling” legislation, which would backdate the VAT payable to the time of the announcement, not the time the policy comes into the effect. However, Rachel Reeves has said the tax will not be applied retrospectively – meaning there could still be time to pay upfront.
In some cases, “fee in advance” schemes may have clauses that allow schools to charge the levy at a later date, but some may still honour the initial payment agreement.
While Sir Keir Starmer initially pledged to add 20pc to private school fees “straight away”, the changes would not start until September 2025. Labour has estimated the move could raise £1.5bn a year which it would then spend on a series of state education pledges, including Ofsted reform and funding 6,500 new teachers.
The promised changes have sparked fears that middle-class families will be priced out, but for parents with spare cash available, paying fees upfront ahead of the VAT raid could save a sizeable sum.
How paying upfront could dodge Labour’s VAT plan
A parent sending their child to the average boarding school from Year 6, when many schools start offering boarding, could save an average of £60,364 over the course of their child’s education by paying all their school fees in one go.
This would cost close to £302,000. However, under Labour, with VAT applied, the cost would rise to £362,000.
Many private schools offer “fee in advance” schemes, where parents pay upfront – often at a discount – and the schools invest the money.
Several leading schools have recently alerted parents to the schemes, to give them a chance to make big savings while they still can.
Among the schools to contact parents about the potential increase in fees because of a new government is St Dunstan’s College in south-east London, where annual fees are nearly £20,000, and Merchant Taylors’ School, in Hertfordshire, where parents pay £25,000 a year.
Parents who have children with confirmed private school places ahead of the next term or new academic year could scramble to pay upfront now, before the extra 20pc charge comes into play.
However, paying upfront isn’t a guaranteed money-saver. The Telegraph has identified at least 11 schools who have added caveats to their terms and conditions reserving the right to backdate VAT payments to avoid being accused of tax avoidance.
Independent schools have seen a 2.7pc drop in enrolments this academic year, according to a report by the Independent Schools Council (ISC).
Julie Robinson, chief executive of ISC, said: “New parents for this year are asking about VAT, you hear that from speaking to any head teacher. There is noticeable concern. Parents are under pressure from the cost of living and recovering from the impact of Covid.
“The majority of families are dual-income households who can afford fees but not comfortably. We’re starting to see already the impact of VAT looming on the horizon.”
An ISC survey found that 20pc of parents “would definitely” withdraw their children if VAT were added to school fees
How the upfront schemes work
For those with cash available as a lump sum prepayment, a fee discount is applied when fees are paid upfront, which typically varies based on interest rates.
Critics of Labour’s plans have warned stripping schools of tax breaks risks making costs unaffordable for parents, resulting in pupils being taken out of private education and burdening the state system.
Financial advisers have urged parents to take advantage of the prepayment schemes if they have the means to, while some schools are preparing to set up prepayment schemes to retain pupils.
However, if Labour does introduce legislation to retrospectively apply the VAT charge, then any prepayment scheme with a retrospective charging caveat could remove any benefit of paying in advance.
Currently, day fees for students average at £231,228 over the 14 years from Reception to Year 13, figures from the ISC suggest.
If VAT was added, this would rise to £277,474 over the same period – an increase of almost £50,000.
Currently, Eton College’s fees would cost £249,990 for the five years pupils spend there. This would go up to £299,988 under Labour, assuming VAT costs are passed on – a rise of £49,998.
On prep schools, a parent could save £44,115 at Cheam School – the school of the late Prince Phillip and the King – if they’re able to pay the bills in one go and avoid the VAT cost.
Andy Butcher of wealth advisers Raymond James said: “The policy is targeting middle-class Britain. From personal experience and from speaking with my clients, Labour’s plans will most affect those with a plan and those who have been saving money up for their children over the past however many years.
“Unfortunately, it blows any planning right out of the water.”
Why Labour wants to bring in the changes
Labour’s manifesto says the measure will raise £1.51bn a year that they can spend on improving standards in the state school system, with plans to hire 6,500 new teachers and bolster mental health support for every school.
They say the tax raid will also fund extra training for those already in post and deliver careers advice and work experience for all young people.
Critics of Labour’s plans have warned stripping schools of tax breaks risks making costs unaffordable for parents, resulting in pupils being taken out of private education and burdening the state system.
The Institute for Fiscal Studies (IFS) has said up to 40,000 children will be pushed out of private schools and into state schools – at a cost of up to £300m per year to the taxpayer. Some have put this number as high as 100,000 children.
Aatif Hassan, the founder of Dukes Education, the largest private education group in the UK, branded Labour’s plans “lazy politics” and said it would drive “more inequality”.
According to Oxford Economics research, private schools contribute £16.5bn to the economy and support as many jobs as Asda, Sainsbury’s and Co-op supermarkets combined, bringing in £5.1bn in tax revenue. The saving to the taxpayer by providing a school place instead of going to state school is estimated at £4.4bn.
Neil O’Brien, the Conservative MP for Harborough, said: “Targeting people who choose to invest in education is very destructive. Unlike luxury holidays or fancy cars, investing in education is socially useful for the country.”
Both Sir Keir and Bridget Phillipson, who served as his shadow education secretary while in opposition, have suggested that schools could cut down on the fees to make themselves more affordable to parents.
Education unions have privately warned Labour that the party’s plan to impose VAT on private schools could cost teachers jobs. The unions have also conveyed concerns that the policy could have the unintended consequence of schools downgrading their pension offer to staff.
There has also been the suggestion that Labour’s plans could even be illegal, with top lawyers warning it could breach human rights laws.
How can parents fight back?
As well as paying upfront, they are other avenues parents can try to go down to ensure their child is privately educated.
Cut prices are sometimes available to parents of siblings all attending the same school – and it is worth asking, even if it is not advertised.
You can use grandparents to help fund school fees either by making gifts or via a trust. Provided the gifts are under the annual £3,000 “gift allowance” per grandparent, there will be no inheritance tax liabilities.
More substantial sums can also potentially be gifted free from tax, as long as the grandparent survives for seven years after making the gift.
Scholarships are also widely available to particularly academic, sporty or musically gifted children, and a number of independent schools offer bursaries to poorer families.
Figures released by the ISC last year showed that private schools handed out £480m in bursaries to disadvantaged pupils in 2021.
The value of discounts given to disadvantaged pupils has increased by 30pc in the last decade. However, close to four fifths of schools say they will have to reduce scholarships and bursaries due to Labour’s tax raid.
