VAT on school fees: everything parents need to know

There are around 2,500 private schools that educate around 6% (560,000) of pupils in England. These range from large well known public schools to smaller and less financially secure schools including specialist schools and faith schools. 

The Labour Party believe that private school fees current exemption from VAT is an ‘unfair tax break’ and have announced that if they win the election they will make private school fees subject to VAT. Labour proposes to use the tax revenue to raise standards in state schools. 

The Conservatives have suggested that the policy would ‘punish aspirational parents’ and believe that private schools have an important role to play in education and that they benefit local communities. 

However, there is now talk in the corridors of Westminster that a growing number of Conservative MPs support the plan to tax independent schools and this won't just be a 'Starmer harmer' for parents who opt for an independent school education. 

If Labour do win the next election and introduce VAT on school fees, this will potentially result in a significant increase in the already rapidly rising costs of private education. 

Here we’ll answer some of the many questions these proposed changes raise for parents with children in private schools, as well as those who are thinking of sending their children.  

Will VAT be charged on school fees?

If Labour win power at the next election it seems likely that VAT will end up being charged on school fees. 

Labour’s Keir Starmer says that he isn’t trying to abolish private schools, just to stop exempting from tax a service that is used mainly by the rich:

“I am very comfortable with private schools, but I want our state schools to be just as good."

Labour propose to spend the money raised on raising standards in state schools. 

About half of private schools have charitable status, which means that they can’t operate at a profit. At the moment this status also guarantees certain tax breaks, notably from VAT, business rates and on donations. Since 2006 schools have had to demonstrate a public benefit, usually through bursaries or links with local schools, to maintain their charitable status. Private schools that don’t have charitable status also don’t have to pay VAT on fees as educational services are currently exempt from VAT. 

Labour’s initial plan was to remove the charitable status of private schools as a way of removing the tax breaks. They have now decided that it will be easier, quicker and less at risk from a legal challenge, to change the tax status without removing the charitable status. They are proposing to make private school fees subject to VAT at the standard rate of 20% as well as removing a discount that private schools currently receive on business rates. These changes could be made as part of a budget or separately.  

When will VAT on private school fees be introduced?

Labour have said that they will introduce the change within a year of getting into power. It is expected that it would happen as soon as possible to maximise tax revenues. 

How much will school fees increase if VAT is added? 

Currently the average cost of private school fees is £15,200 a year. However, there is a huge variation across the sector with the most exclusive public schools like Eton, Harrow and Winchester College charging up to £50,000 a year and smaller more specialist schools charging as little as £10,000 a year. 

If the full cost increases were to be passed onto parents, average school fees could rise by up to £3,000 a year with those at the most expensive schools facing increases of up to £10,000 a year. Analysis by the Telegraph newspaper suggested that the introduction of VAT charges would push most boarding school fees over £30,000 a year. Their figures show that the average cost of a private education from age 7 to 18 would rise to more than £825,000, more than double the average cost of £378,000 for a child who completed their A Levels this summer. 

The actual increase in school fees will, of course, depend on how much of the increased costs schools pass onto parents. 

The Labour leader, Keir Starmer, in an interview with the BBC, said that it is up to schools whether they pass the increased costs onto parents:

“The school doesn’t have to pass this on to the parents in fees. And each of the schools is going to have to ask themselves whether that is what they want to do.” 

However, schools are going to have to find the money from somewhere. There are several ways in which schools could avoid having to pass on the full cost to parents: 

• The proposal is to levy VAT at the standard rate of 20% onto school fees. However schools will be able to recover VAT on other expenditure so the effective rate of increase in costs for schools is likely to be closer to 15%. Some elements of the school fees, such as welfare services and transport services might also be exempt from VAT, further reducing the overall VAT cost. 
• Some schools have significant cash reserves or other assets that could be used to avoid passing the full cost onto parents. However, this will not be the case for a lot of schools. 
• There are concerns that some savings might end up being made by reducing the provision of bursaries, discounted fees and outreach work with local schools.

According to Julie Robinson, chief executive of the Independent Schools Council: 

“While schools will work hard to keep fees affordable for parents… many schools will be forced to increase fees despite their best efforts.” 

Even without the possible changes to VAT, private school fees have already been rising steeply, with an average rise of 8% in the last academic year. This is due to several factors, including wage price inflation, increases to teacher pension scheme contributions and increased energy costs. 

How could imposing VAT impact on fees? Use this calculator

Fees may top £30k a year at a quarter of private schools under Labour tax plan, according to the new analysis published in September 2023. You can use this search tool to see how much your child's fees could rise under Sir Keir Starmer's VAT proposals. 

How would bursaries and discounted fee arrangements be affected if VAT is added to school fees?

The Independent Schools Council says that a third of children receive some kind of support with school fees, although only 1% are on full bursaries, so this will be of concern to lots of families. Where bursaries cover the full cost of education, clearly no VAT would be charged, as no payments are made. However, this might be slightly more complicated in cases where bursaries are funded by third parties rather than by the school directly. 

Where bursaries are partial or in the case of discounted fee arrangements, VAT would be chargeable only on the amount of the fees paid. This potential increase could have a significant impact on some parents. 

Would VAT on school fees still be charged to parents living overseas and on fees paid by grandparents or other third parties? 

Yes, as the service is being provided in this country, overseas parents would still have to pay. Fees paid by grandparents and other third parties would also still be liable for VAT. 

If private school fees are paid in advance, would VAT still get added? 

Some schools offer the option for parents to pay all school fees in advance, instead of yearly or termly. It has been suggested that fees paid in this way, before the introduction of a VAT charge, might not be liable for the charge. Since the announcement, some private schools have been reminding parents of this option. However, apart from the fact that very few parents would be able to afford this, there are several reasons why it might not apply. One, pointed out by The Independent School Bursar’s Association, is that the government could change the rules so that the VAT is levied when the money is spent rather than handed over. 

Would charging VAT on private school fees result in children leaving schools?

A survey by the Independent Schools Council suggested that as many as 20% of parents would withdraw their children from private schools. This would have a significant impact on the survival of many private schools. However, it is hard to predict what the numbers would actually be.  

A report by the Institute of Fiscal Studies suggests that the numbers might be much lower, 3-7%, especially immediately, as parents might be reluctant to move children from schools part way through their schooling. Economists argue that private school numbers have stayed stable despite price raises in the past and that parents consider a host of other factors alongside cost when committing to private education. 

Would adding VAT on private school fees lead to school closures?

There is a large variation in the types of private schools and increases in costs would have a much larger impact on some schools than others. 

Some of the larger, more well known, private schools such as Eton and Harrow, have annual fees of £50,000 and so would be looking at a potential large increase in fees of up to £10,000. However, they have the financial resources to take on some of the increase themselves and a generally wealthy parent group. 

A lot of smaller private schools, where fees can be much lower, won’t have the same resources and support and might struggle to survive. These smaller schools include faith schools, foreign language schools, schools with different teaching philosophies and schools which cater for children with particular special needs. The Economist warns that the impact ‘would be unevenly distributed’ across private schools, with smaller schools being much harder hit. 

Julie Robinson of the Independent Schools Council has argued that the tax changes would “threaten the survival of the smallest independent schools”.

It is hard to predict how many schools might have to close but school leaders have suggested that 200 mainly smaller schools might be at risk of closure. 

There may be options for private schools who are struggling to survive to be supported to become state schools, as happened under the previous Labour government. 

How much money might be raised for the government by charging VAT on private school fees?

The Institute for Fiscal Studies (IFS) estimates that removing tax exemptions on private schools would raise about £1.6 billion a year in extra tax revenue. This would come from VAT and changes to business rates. Critics of the plan have argued that this amount would be reduced due to children moving out of the private system into the state system, resulting in fewer fees to tax and increased costs to the state sector. However, the IFS argue that the spending released by children leaving the private sector would probably be spent on other VAT able expenses so the overall revenue generated would be the same. 

Some of the money raised would have to be used to educate children who move into the state system as a result of the changes. The IFS estimates that this would cost £100 – 300 million. This would leave a net gain of £1.3 - 1.5 billion a year, which would allow for a 2% increase in state school spending. 

What would the money raised from VAT on private school fees be used for? 

Labour have said that the money would be used on a range of measures aiming to raise standards across the state sector. Some of the possible uses that have been mentioned include:

• funding 6,500 new teachers which would increase the overall number of teachers in the state sector by 1%
• increasing the numbers of teachers in shortage subjects such as maths and physics 
• bonus payments of £2,400 to stop new teachers leaving the profession. 
• oracy programs to raise language standards
• programs to help the most disadvantaged students including breakfast clubs

What have responses been to the plan to charge VAT on private school fees?

As would be expected, private schools and bodies that support them have argued strongly against the removal of the VAT exemption on school fees. Private schools leaders argue that they already benefit state schools by reducing the numbers of students that they need to educate and through their partnerships with local schools. 

The Independent Schools Council (ISC) also argues that VAT isn’t payable on other education spending, such as nurseries and undergraduate tuition fees and so private school fees should remain VAT free too. The ISC have also pointed out that most other countries don’t tax school fees and that if we were still in the EU we wouldn’t be allowed to.

Bridget Phillipson, Labour’s shadow education secretary, argues that scrapping tax exemptions for private schools will enable Labour:

“to fund the most ambitious state school improvement plan in a generation”.

The government has backed keeping the VAT exemption, arguing that:

“Independent schools have an important role to play in providing further opportunities for children… through targeted bursaries and by working with local state schools to share expertise, best practice and facilities.” 

A poll by IPSOS, reported in the Independent newspaper, showed that over half of those polled supported the change. A majority of Conservative voters backed keeping the tax exemption, whereas a majority of Labour voters supported it being removed.

The proposal to remove the VAT exemption on private school fees arouses strong feelings on both sides. There’s likely to be a lot more discussion of this issue and continued uncertainty for parents.