How to cover the cost of rising school fees as Labour proposes to add VAT to private education

Ashbridge Partners recently ran an in-depth research report on 1,000 UK parents with children in independent schools in Great Britain to discover the potential impact of Labour’s proposed policy to introduce 20% VAT to private education. The report was featured in the FT online and on the front page of the FT Money section. The results were surprising. 39% of parents will or likely have to withdraw their children from private school as the sudden hike in fees will be a burden too big to bear for many. 

In London and the South East, the situation was even worse. Ranked by the latest ONS House Price Index as the top two most expensive places in the UK to buy a property, one in five parents in both regions will definitely have to remove their children from private education should Labour win the next election, while nearly a quarter (23%) of parents in the south east will need to take another job to cover the additional costs.  

Based on current ISC/IFS figures, this will push 242,000 children nationally into an already over-stretched state education system and could wipe out £3.98bn in fees paid to UK private schools. 

The parents we polled aren’t alone in their concern over Labour’s policy. Labour leader, Sir Keir Starmer has been met with significant criticism from both parents and private schools nationwide over his suggestion to tax children’s education. Over 97,000 parents have already signed a petition urging Labour to halt their proposal of VAT on school fees. 

Meanwhile many are questioning the ethics of this policy with concerns that the change will make fees unaffordable for a large proportion of parents. The likely result is that we’ll likely see a decrease in domestic pupils attending private schools and an increase in the number of foreign wealthy students.  

In fact, our study discovered that nearly 15% of parents will move their children into state education as early as after prep school if the 20% tax increase is introduced. Almost one in ten parents say that moving their child into state education will mean the money they save on VAT will be enough to afford to move their children back into private education later on in their schooling for GCSEs or A-levels.  

However, for some parents being able to afford the spiralling cost of private education comes with significant financial and social sacrifice. Nearly a third shared with us how they will have to re-mortgage their home, and more than one in ten will be forced to sell their property (11%) or take a second job (16%) if fees go up under a Labour Government. A handful of parents also said they would have to rent out their spare room to cover the extra cost.  

But that’s not all. Families will have to cut back on ‘extras’ such as school trips (39%), cancel or cut down on family holidays (26%), trim down on household bills (15%), downsize the family car (11%), and reduce pension contributions (6%).  

These figures are much higher in some regions with more families in the South East (40%), North East (48%) and Wales (50%) planning to reduce school trips. Well over a quarter in the South West (30%), Yorkshire (34%), Midlands and Wales (28%) are cutting down their spend on family holidays.   

So, what can you do to manage your finances to help cover the cost of rising school fees? 

Should you pay school fees upfront? 

What was reassuring from our findings was that around 30% of parents we spoke to are speaking to a finance and mortgage advisor, like Ashbridge Partners, for help.  

Paying fees in advance may be one of the best ways to protect your finances from the risk of the rising cost of private education while securing your child’s future place in their school. It could negate the impact of Labour’s proposed VAT introduction should anti-forestalling rules not be imposed. When considering paying fees upfront, weigh up the benefits of this against the risk of then needing to withdraw your child from that school for any reason. 

What was surprising from our research though was how few schools are offering parents the choice to pay for school fees upfront. Only 6% of parents have been contacted by their school offering this option ahead of the UK general election.  If you haven’t had communications from your school on this matter, contact them to understand what options they may offer for advance payments. For those who can afford to pay upfront, it could be worth hedging your bets and paying a proportion of the fees in advance to manage any risk.   

The reality though is that a huge 97% of the parents we interviewed are not planning to pay school fees upfront, even though it could protect against any spike in costs. Half said that it was because they can’t afford this option, which was the same for parents in London and the South East, while 15% of UK parents would rather ‘risk it’ and see if Labour gets into power.  

What are the other options? 

For those for whom upfront fees pose a constraint, exploring various financing options, including asset sales, increasing mortgages, or liquidating investments, could be a recommended route to covering rising education costs. 30% of the parents we polled plan to liquidate assets, 27% to cash in on investments, and 12% will draw on trusts.   

For asset-rich families, one option worth considering is taking out a loan against certain assets, such as fine art pieces. Though this may entail a 10% interest rate, it could be a suitable solution for some. Asset sales may have capital gains tax implications so discuss with your accountant before taking any action.  

Increasing a mortgage requires research and a window of time to make the necessary arrangements so many people are beginning to plan.  We expect the next quarter will bring a return to the sub 4.00% fixed rates as inflation falls and central banks become more confident that they have inflation under control.  This is a real positive for those seeking to review their mortgage.   

Rising school fees whether politically driven or a standard yearly rise by the school, can place families under considerable financial stress, especially when it’s a significant increase. If you are considering any of these options and would like to discuss them with an advisor, our specialist finance and mortgage team are here to help. We offer strategic independent advice to find the best solution for you and your circumstances. 

You can contact us here or for more information on Ashbridge Partners, visit us here or follow us on LinkedIn @ashbridge_partners_ltd