Labour’s school fees VAT threat sends a chill through parents

Nicolas Maari admits that Labour’s plan to impose value added tax on private school fees, should it win power at the next election, has shaken his budgeting “quite drastically”.

The property consultant who lives in Paddock Wood in Kent planned to send his two children to private school for their entire education. He says that will now not be possible if Labour’s proposal goes through.

“Without the VAT we would have struggled but we would have put them through,” he says. “But sending two kids to private school for secondary — we wouldn’t be able to afford it if VAT is added.”

Maari has not yet decided what he will do if the 20 per cent levy is passed on to parents. 

One option would be to keep his elder child, who is eight, in a private school and put the younger one, who is still only one, in state schools. But he concedes that is “unfair”. “So we probably won’t continue in the private sector at secondary and try and get them into a grammar school.”

Maari and his wife Anastasia, who also works full time — for an architectural practice, are far from unique. Tens of thousands of parents who regard educating their children privately as their main, and sometimes only, luxury are wondering how they will find an additional several thousand pounds a year — per child — from post-tax income or savings.

Their anxiety is exacerbated as the pricier school fees will come on top of rising mortgage costs and much higher costs of living than a few years ago.

Parents are worried

The independent sector in the UK educates approximately 620,000 children in more than 2,500 schools, according to the Independent Schools Council, an umbrella group for 1,400 schools. This is about 5.9 per cent of the total number of schoolchildren in the UK and around 6.5 per cent of the total number in England. The proportion educated privately for A-levels is more than double this.

Average fees per term at ISC member schools range from £13,000 at boarding schools to £5,550 at day schools, according to the council’s 2023 annual report. These represent a rise of 5.2 per cent for boarders and 5.8 per cent for day schools compared with the previous year.

Research commissioned by finance advisers Ashbridge Partners, published on Friday, found that 18 per cent of parents would definitely move their children out of private schools and a further 21 per cent would probably do so.

The financial plight of parents struggling to fund private education is unlikely to win much sympathy in a society where the great majority are state educated. Many state pupils attain the highest academic standards and go on to top universities.

Private school parents nonetheless face invidious choices about whether or when to disrupt their child’s education — or which sacrifices they need to make.

The Ashbridge survey of 1,000 parents across the country found that 30 per cent of parents planned to remortgage their homes to fund the fee increase, a similar figure would liquidate assets, 27 per cent would cash in investments, 16 per cent would take a second job and 11 per cent would sell their home. Some would do a combination of the above, among other things.

Some parents are also looking at paying in advance before the VAT is imposed, particularly if that came with a discount. But this is not risk-free: schools might go bankrupt or not return the money if a child has to move. And the levy could be imposed at the point of delivery rather than the time of payment.

“The imposition of VAT will definitely have a significant impact because lots of parents funding the existing cost of education are on the edge,” says Mark Ashbridge, co-founder and managing director of Ashbridge Partners.

“Most parents do some fairly detailed financial planning around [paying for private education] and it’s a lot of talk of spreadsheets and in those spreadsheets they know what the school fees are. They know roughly what the inflation rate on school fees might be, and you can pretty well map that out.”

Remortgaging hurdles

Remortgaging one’s property to pay for higher fees might not be as simple as some parents think, brokers say. 

“If the income stays the same but your outgoings have increased because of rising school fees, people are asking what this might mean for their capacity to borrow,” says Adrian Anderson, director of mortgage broker Anderson Harris. “An additional £4,000-£5,000 a year will have an impact on how much they can borrow.

“We’ve had many chats with clients who’ve got children in private school and there are concerns,” he adds. “It’s one of the outgoings that has the biggest impact on their mortgage capacity.”

Some parents, particularly of younger children, are looking to lock in new mortgages before they need to start paying school fees, in order to pass the repayment stress tests more easily and so secure a larger loan or better interest rate.

Financial advisers say they are also seeing a rise in new client inquiries as a result of the VAT proposal.

“We have seen some queries from families looking to adjust their investment portfolio so it generates more income and looking to reduce personal taxes to increase what they have to spend,” says David Goodfellow, head of wealth planning at Canaccord Genuity Wealth Management.

“This might involve transferring ownership of assets between spouses to reduce tax, but the planning options available will depend on the circumstances,” he says.

Among the dozens of parents who shared their views with the Financial Times on the issue of adding VAT to fees, those who arguably feel most anxious are people whose children have special educational needs. Many say the provision in the state sector is inadequate.

Abigail Southworth, who has a five-year-old autistic son and a three-year-old daughter, says she feels she’s “living on borrowed time” and that the VAT proposal has “thrown a bomb into my financial modelling”.

“I’m fortunate to work in the City,” she says. “I do earn much more than the average, but I’ve been spending a fortune on early interventions — occupational therapy, speech therapy, play therapy and much more to give him a fighting chance.

“Can I absorb a 20 per cent increase that the school is bound to pass on? I’m trying to look at everything. I don’t know, to be honest. I would have to dial down the therapeutic interventions now to afford the independent education later.”

She is also thinking of moving to a higher-paying job, and has cut back on “bits and the holidays”. 

The state school crunch

Many parents tell the FT one of the reasons they plan to do all they can to keep their children in the private sector for as long as possible is because they worry about the struggle to find a vacancy at a decent state school if tens of thousands of additional children are chasing a limited number of available places.

“The scrum to apply for state schools and get allocated a school that you’re happy with is a nightmare,” says Matt Connolly, who works for his family’s logistics business and has two children at Staines Prep School in Surrey. “And doing that for a child who’s gone beyond the standard admission age is almost impossible. You’ve got to find the right fit for your children’s needs but it seems like you’re going to be punished for doing that.”

Danny Lopez is a technology executive in south-west London who put his three children in private schools, after the eldest ended up 75th on the waiting list at the state primary school less than five minutes’ walk from his home. He says that if Labour wanted to impose VAT on private schools it should not rush the policy. 

“I understand the objective but it seems this is putting it the wrong way round,” he says. “They should fix the system first and then impose the VAT.”

Few parents of children in the private sector think significant fixes are likely, particularly as a result of state school budgets being squeezed. The Institute for Fiscal Studies (IFS) think-tank said last year the core budget for state schools is expected to rise from £52.6bn in the 2019-20 academic year to £58.6bn in 2024-25, in 2023 prices. But it also estimated that state schools’ costs are rising at 7 per cent this year, much faster than inflation, which is currently at 4 per cent. The £1.5bn that Labour estimates the imposition of VAT on fees will raise, will therefore “not move the needle very much”, one private school bursar says.

Labour has given few details of when the policy might be implemented, but schools and parents in the private sector assume it will be one of the first measures brought in if, as opinion polls suggest, the party wins the general election that must be called this year.

A Labour win in a November election could mean VAT being imposed as soon as the school year starting in September 2025, say economists, since HM Revenue & Customs would resist its imposition in the middle of an academic year. 

A mass exodus?

While the survey suggests more than 200,000 children might leave the private sector, financial advisers and economists doubt the exodus will be anywhere near as large, particularly in the short term.

Chris Black, financial planner at wealth manager RBC Brewin Dolphin, says that while the proposal for VAT on fees had brought the financing issue “to the forefront of many clients’ minds” and “could present a challenge in some instances, the above-inflation rise in private school fees over the past 10 years means clients are no strangers to this increasing cost”.

Luke Sibieta, a research fellow at the IFS, believes there is “a sense of a bit of panic” among parents. “It won’t be tiny money and I’m sure parents will have to make changes in their budgeting but it won’t be out of this world money,” he says.

The IFS estimates the reduction in private school attendance will be between 20,000 and 40,000 children, based on previous evidence of how fee rises have affected the school population. 

“Most of the time when we see changes in consumption behaviour, most people’s estimates don’t correlate with what they do in practice,” Sibieta says.

Part of the reason he does not think the exodus will be so dramatic is because it is unlikely schools will pass on the full 20 per cent to parents. Boarding fees are likely to be exempt and schools will be able to claim back the VAT they spend in other areas, such as capital projects.

“Schools can deduct some input costs and make some savings, so the increase is more likely to be 10-12 per cent, perhaps a maximum of 15 per cent,” he says. “It’s not inconsequential but it’s more manageable than 20 per cent.”

The bigger impact is likely to be felt in the medium to longer term, analysts say. Parents are “throwing it into the bundle of financial challenges that they can foresee in the future,” says Mark Ashbridge. “How do we restructure our living costs to accommodate it? Parents with children not yet at the stage where they might move across to the private sector, they might be reassessing.”

Such views are of little consolation to parents like Connolly and his wife Rabekah and the tens of thousands of parents struggling to pay school fees. “If it came in overnight I think I would have to pull one [child] out,” he says. If it came in in the following September it gives you a bit of time to put a war chest together and make the cutbacks.”

But even that would not be easy. “Running a family business is already a 24/7 operation,” Connolly adds. “My wife works full time too and then you let the kids down. It’s very difficult to expect families to do more and inflation is still high. It’s a hard job for everyone.”

Letter in response to this article:

Labour’s divisive red meat policy on private schools / From Alexandra Cambouris, London SE21, UK