An excellent education can make a significant difference to the opportunities that your child has in life. Giving them the best possible start could mean they find it easier to establish a career and remain financially stable as adults.
That is why you may decide to send your child to a private school. However, this comes with financial implications you must consider.
The cost of education can take up a large portion of your budget, especially after recent changes to the tax treatment of private school fees. There are other challenges to consider when paying these expenses, too.
Read on to learn five important tips for managing school fees.
1. Create a long-term plan when budgeting for school fees
School fees can be considerable, so you will need to budget for this expense. It is important to consider how much you need to pay each year, and when the payments are due. Some schools allow you to spread the payments, while others may require payment for the full year at once.
Incorporating this into your budget means you can set aside cash each month and ensure you can comfortably pay the fees without sacrificing other areas, such as pension contributions or investments.
However, it is important that you not only consider the fees for the current year. Instead, create a long-term plan for the entire time your child will be at school. Account for the fact that you will pay this expense for several years, and that the fees will likely increase over time.
You may also want to consider additional schooling costs such as uniforms, equipment, musical instruments, and trips.
By creating a clear budget for the entire school career of your child, you can make sure that you set aside enough funds to comfortably pay all the necessary expenses.
2. Understand the recent VAT changes
When budgeting for school fees, it is important to consider the recent VAT changes introduced by the government on 1 January 2025.
Previously, private school fees were exempt from VAT, but after the change, all payments are now subject to 20% VAT. Schools also lost eligibility for charitable business rates relief from April 2025.
The way VAT works is that the school adds the cost to their fees and then pays the collected tax to HMRC. As a result, fees could increase significantly.
For instance, if you were previously paying £18,000 a year in fees, a 20% increase would mean you pay another £3,600 because of the VAT change.
While schools can reclaim VAT on certain expenses, and some are looking for ways to reduce costs, the majority of the 20% increase will be passed on to fee payers.
You will need to account for this rise when planning your budget and deciding how you will cover private school fees.
3. Start saving early for younger children
If you have children or grandchildren who are not yet at school, you may want to start saving right away.
By putting money aside during the early years, you build a healthy pot to help cover their fees, lessening the financial impact once they start school.
It is important to consider tax-efficiency here and take advantage of tax wrappers, including ISAs, when building wealth to pay for school fees. We can support you with this.
4. Consider Inheritance Tax gifting rules if grandparents want to contribute
As the cost of private school increases, grandparents may want to help cover the fees. This allows grandparents to pass wealth down the generations now, while they are still able to see how the gifts benefit loved ones.
Additionally, any contributions could reduce the size of their estate for Inheritance Tax (IHT) purposes. However, it is important to understand the various IHT gifting rules that could come into play.
For example, each person can give £3,000 a year, and this amount is immediately IHT-free. This is the gifting annual exemption, and it is an individual allowance, meaning a couple could give £6,000 a year between them.
Depending on what percentage of the fees they want to pay, grandparents may give more than this each year. Payments that exceed the gifting annual exemption will only be IHT-free if the donor survives for seven years after giving the gift.
Should the donor pass away in this period, there may be some IHT to pay. This is worked out on a sliding scale known as taper relief.
Meanwhile, there is a different exemption, called the gifts from surplus income rule, which may allow grandparents to make unlimited IHT-free gifts, provided they are:
- Regular payments
- Come from income rather than capital
- Do not affect the quality of life of the donor.
This gifting strategy might be more suitable for school fees, in some cases. That said, it is important that gifts qualify for the exemption and you have clear records of any payments, in case HMRC requires evidence later.
If grandparents do want to help, we can discuss the various gifting rules and exemptions and determine the most appropriate option for your family. We will also give guidance about keeping records to ensure you do not accidentally trigger an IHT charge later.
5. Be aware of common private school fee scams
Private schools have become a target for scammers in recent years. According to a report in the Guardian, a survey of 100 fee-paying schools found they had all been targeted by an attempted or successful cyber-attack.
Once scammers have details of the students and parents, they will contact you and attempt to convince you to make payments to a different account. The average amount lost to this kind of fraud was £3,200.
As such, you must remain vigilant. If you receive communications claiming to be from a school that your child attends, always act with caution. Do not send fees to a different bank account. Instead, contact the school directly and confirm any changes first.
Get in touch
Incorporating school fees into your financial plan means you can manage the cost without affecting your wider goals. You may be able to take advantage of estate planning benefits if grandparents are supporting you with the cost of education, too.
If you need some guidance, please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.