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How might VAT on school fees affect your finances?

As we approach the next UK general election in July, the two major parties in the race for government are developing their manifestos, with pledges set to cover everything from infrastructure and policing to healthcare and education.

One such pledge that has been bandied for a while and has received a great deal of attention in recent months is Labour’s intention to introduce VAT on private school fees at a rate of 20% should they take power. Currently, UK independent schools are exempt from charging VAT on their fees; they are also entitled to business rates relief on the buildings they occupy, as well as Gift Aid on monetary donations.

Even though Labour does not plan to remove independent schools’ charitable status, the party proposes the removal of their VAT exemption and entitlement to business rates relief which, it says, could bring in an additional £1.6bn per year into the government’s coffers. Labour says that the money will be used to recruit more teachers and increase access to mental health counselling within the state sector, among other measures.

What impact could this have?

If you already have a child or children in private school, then you will likely already have felt the impact of fees inflation last year, with prices rising by 8% on average.

It is understandable, therefore, that you might be filled with dread at the prospect of a further 20% rise and that you may even be wondering whether this could spell the end of your child’s private school career.

Please do not panic. Firstly, it is highly unlikely that parents will be forced to bear the full cost of Labour’s plans should they win the election. Instead, it is more likely that schools will be able to absorb at least some of the cost in order to support parents and retain as many pupils as possible, with parents then expected to fund the remainder. For example, if VAT becomes chargeable on school fees, then schools will be able to recover VAT on the costs they incur related to the supply of education – something that they currently cannot do due to their VAT-exempt status.

Secondly, even if they do win the general election Labour’s plans will not come into effect immediately. Currently, the proposals are light on detail as to how the change will be effected in practice, but it will require legislative change to remove independent schools’ VAT exemption. Labour has said it plans to introduce the reform during its first year in office.

This means that parents still have some time to review their financial plans and seek expert advice on how they might best navigate a potential fee increase.

Looking to the future with cashflow modelling

The key to keeping your child in school in these uncertain times is planning, planning and more planning. It is vital to seek expert financial advice to help you understand your options with regards to raising the additional money required to keep your child on the educational path you have mapped out for them.

Many parents do not realise the sheer variety of options that may be available to them when it comes to funding their child’s education; with a specialist financial adviser on your side, you will be able to consider your options and make an informed decision as to the method, or combination of methods, that will best cover any shortfall you may be facing whilst minimising the impact of those additional costs on your wider financial plans. For more information about the various methods of financing your child’s private education, please do download our comprehensive guide to school fees planning, which you can access by filling in the form below this article.

At S4 Financial, we have been advising parents on school fees planning for several decades. Using specialist cashflow modelling technology, we help our clients understand exactly what they need to save, and over what duration, in order to meet their goals. We build a range of scenarios into their personal school fees model, including assumed growth and inflation rates and any other factors – such as a potential hike in fees due to Labour’s plans – that may impact their savings plan.

Should you be considering a private education for your child, S4 Financial is here to help. Please do give us a call or email hello@s4financial.co.uk to book a free, initial consultation with an expert adviser.

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Should you wish to book a consultation with an adviser to see how we can help you grow, maintain and preserve your wealth for a prosperous future, please do get in touch.

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