Navigating the impact of VAT on School Fees

From the 1st of January 2025, a significant shift took place in the financial landscape of private education, with the introduction of VAT which is now applied to private school fees.

From the 1st of January 2025 VAT has been applied to private school fees. This change affects not just the term beginning in January, but also any fees paid from as early as 29th July 2024 that relate to that term or beyond. For families already juggling rising living costs, this adds substantial pressure, particularly for those enrolling a child this September or adding a second or third sibling.

Whether you’re funding school fees from personal income or business profits, it’s essential to understand these recent changes, and what can be done to mitigate them. In this article, we’ll break down what’s changed, how it’s impacting families, and explore planning strategies, particularly for business owners who are well-positioned to be taking proactive steps now.

What has changed?So, what has changed, and why have these changes been made? VAT at the standard rate is now chargeable on private school fees. However, the impact of this started earlier than this date, as any fees paid on or after the 29th of July 2024 that related to the January 2025 term were also subject to VAT. Therefore, it is likely that parents will already be feeling the financial impact.

Additionally, starting April 2025, private schools that are registered as charities will lose their charitable business rates relief, which previously gave them an 80% discount on their premises business rates. Whilst not directly hitting parents, it is expected that these schools will begin to pass on some of these additional costs to fee payers, increasing the costs even further.

Labour have pledged that by private schools charging 20% VAT on school fees, it will raise money which will be invested into state schools. They are predicting that it would raise more than £1 billion a year.

What does this financial impact mean for parents?Private school fees are often already a very substantial burden for many families, and the 20% increase due to the VAT introduced on January 1st has exacerbated this struggle, particularly for those enrolling children into private education this September or enrolling a second sibling.

Many parents have had to make the difficult decision to take their children out of private school and put them into state school, it has been said that at least 35,000 children could be displaced from private school due to these increased costs. An average annual school fee, for example, costing £15,000, will now cost £18,000 once the 20% VAT has been applied. For families with more than one child in private education, this increase will be an even greater burden.

How can business owners mitigate these increased costs?Many business owners will be asking the obvious question - 'Can I use the cash in my company to pay for these increased school fees?' Balancing the rising cost of living and funding your children's upbringing is an ever-increasing challenge. With the right planning, it’s possible to mitigate some of the impact, legitimately and efficiently. Children growing up through their life can cost money in lots of different ways - or, does it have to cost so much?

The reality is, for many company shareholders, there is a hidden tax cost on these extra drawings used to support their family wellbeing and needs. Business owners will be seeking more ways to tax-efficiently extract cash from their business. There is always a significant need to do this, but likely to be even more so with a potential increase in private school fees, along with other family and life needs.

At Oldfield, we are confident in helping business owners unlock more cash out of their company in the most tax-efficient way to provide for their personal and family needs. Many business owners rely on their businesses to support personal expenses, including school fees. However, how you extract funds from your company can significantly affect how much tax you pay.

What can you do to plan ahead of the new school year?While the VAT introduction is already in effect, there’s still time to plan and mitigate its long-term impact, especially for those looking ahead to future academic years or younger siblings yet to start. For business owners, this is a perfect opportunity to align personal financial goals with your company’s tax planning. With careful structuring, you can ease the pressure of rising school costs while making the most of your business’s financial position.

How can we help?At Oldfield, our tax consultants are extremely experienced and knowledgeable in this field, with the firm having nearly 50 years of experience. Our approach to profit extraction is specifically developed and designed with business owners in mind. However, it is important to note that every situation is unique, and unfortunately there isn’t a one size fits all, or guaranteed solution.

If you would like to find out more about how we could help you extract profit from your business tax efficiently click here to find out more. Or to have a discussion with one of our tax advisors on how Oldfield could help you extract profit, please click the below button.

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Please note: This article is provided for information only and was correct as at the time of writing (15/05/25). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.