Labour’s VAT raid on school fees: Tips on how parents can manage a 20% hike in education costs

Discover expert tips for managing rising school fees, including VAT impacts and financial planning strategies for parents

The Labour Party is in power and that means it will introduce VAT on private school fees starting from September 2025. With the average annual day fee already at £18,064, this move could significantly impact parents’ finances and the wellbeing of their children, pushing the seven-year secondary school cost from £140,522 to £168,633 once VAT is added, according to figures from the Independent Schools Council.

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, shared her insights on how parents can manage these rising costs:

“Paying school fees is no picnic for parents. Soaring costs in recent years have already meant having to stretch their finances, and there’s a risk that if the extra expense of VAT is passed onto them, some will find it a stretch too far. However, there are some things you can do to get on top of it,” Coles explains.

Practical Tips for Managing School Fees

Here are seven practical tips, drawn from expert advice, to help you manage and plan for these increased expenses:

Start as Early as Possible: This may be stating the obvious. That said, begin saving or investing as early as you can. With a long-term horizon (5-10 years or more), consider investing in funds with stock market exposure. This approach, while risky, could yield higher returns compared to cash savings. Don’t forget to use your stocks and shares ISA allowance each year which can help grow your school fees fund tax-free.

Seek Help Early: Grandparents or other relatives might be willing to contribute, especially if they can plan for it well in advance. Contributions spread over a longer period can be more manageable and impactful.

Consider Bare Trusts: If your ISA allowance is maxed out, investing through a bare trust can be beneficial. An adult invests on behalf of a child, with the child receiving the assets at 18. Trustees can withdraw money earlier for the child’s benefit, including school fees. These trusts are easy to set up and often come with tax advantages.

Explore Educational Trusts: For larger sums, setting up an educational trust can ensure funds are dedicated to education. Although there are setup and running costs, this option provides certainty and can be structured to reclaim taxes using the child’s allowances.

Choose the Right Savings Account: For funds needed within 1-5 years, keeping money in cash but securing higher interest through fixed periods is sensible. Use competitive easy access accounts or cash ISAs instead of low-yield high street savings accounts.

Consider Offsetting: If remortgaging to free up equity for fees, an offset mortgage might be considered. It allows you to keep school fee money in a linked savings account, reducing interest until you need to pay the school. This option offers flexibility to top up the account and manage interest payments effectively.

Inquire About School Assistance: Over a third of students receive financial help with fees, including discounts for specific groups and means-tested bursaries. Ask schools about available discounts and payment arrangements, such as monthly payment options, which can be more manageable than lump-sum payments.

Coles stresses the importance of proactive financial planning:

“Before you start, it’s worth exploring what help is available from various schools, especially if your child is gifted academically, musically, in drama, or sports. Otherwise, you can ask about discounts to see if you qualify. Most schools offer discounts for siblings or staff members, and some have lower fees if you do specific jobs, such as the clergy or armed forces. In any case, if you’re already attending the school and have short-term problems paying fees, talk to them about their hardship arrangements.”

By taking these steps, parents can better navigate the financial challenges posed by the impending VAT on school fees and allow them to continue at their current school.

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