VAT on Private School Fees

It’s a headline policy of the new Labour Government, prompting much claim and counter-claim and now, it seems, legal action. So, as part of our mission to provide some clarity amidst the fog, this is what the data says.  

What is it about?

Currently, private schools are eligible for tax breaks.  They don’t have to charge VAT on tuition or boarding fees, and if the school is a registered charity (of which around 75% are), they receive 80% relief on Business Rates (i.e. the charge that local authorities put on all business properties in their area) [1].

From January next year that will change and the promise, according to Chancellor Rachel Reeves, is to spend the additional tax income on education in the state sector [2].  

The numbers…

Around 6% of pupils in the UK are educated in the Private sector, versus the State. This is how it breaks down for 2023-24 academic year…

This is the annual amount spent on a state school pupil versus the average fee paid in the independent sector, 2023-24:

The amount of tax expected to be raised from charging VAT on private school fees is…  

It is equivalent to 2.8% of the UK Core Schools’ budget for 2024-25 (£60.7bn) [5].

It’s also the equivalent to funding one of these options below…

Will charging VAT on fees drive down pupil numbers in the private sector? 

The Institute for Fiscal Studies (IFS) estimates a potential 3-7% drop in pupil numbers over the medium to long-term if VAT on fees were to be introduced (but minimal impact on the total tax ‘take’ given parents who opt-out would spend in the wider economy instead [8]).

The IFS also suggest there’s good reason to believe the drop-out rate would be at the lower end of the estimates. The private sector has a long history of raising prices on parents. Since 2003 there's been an average 55% real-terms increase in fees [9] [10].  However, over that 20-year period, the overall number of private school pupils has remained steady at around 570,000.

In early October, the Independent Schools Council (ISC), which represents ~80% of private schools in the UK, reported a 1.7% drop in pupil numbers for the start of the current 2024-25 academic year. It equates to just under 10,000 students. Any student entering the state system would require funding and the ISC calculated the commensurate uptake in state school places would cost an additional £93m per year [11].

Can the state sector cope with an influx of new students?

The number of unfilled secondary school places in England in 2022-23 is 1.04 million [12], and there remains excess capacity for school places in all regions of England…

Less than 1% of pupils in any region attend a school which is at over-capacity (the highest regional average is 0.82% of pupils in the North East and East Midlands). 7% of schools in England are exceeding pupil capacity by 10 or more students.

Will this influx adversely impact choosing a ‘preferred’ state school? 

This is the ‘who got what’ for the academic year starting in September, 2024…

Any significant issues with being allocated a place in a preferred-choice school seem to be localised. Only 22 out of 160 Local Education Authorities (LEAs) in England were below 90% in terms of a pupil getting a top-3 preference for secondary school - 17 of those LEAs were in London, the others were Birmingham, Wolverhampton, Liverpool, Telford and Slough (which was lowest with 84.4%) [14]. 

These localised issues are also likely to improve. An ongoing decline in the birth rate since the early part of this century means the total number of pupils in secondary schools has been declining rapidly, and will continue at the rate of 100,000 fewer pupils every year until 2030 [15]. 

What happens next…

The Government made the announcement on changes to the tax position of private schools in its budget statement on 30th October 2024.

On 31st October, the Independent Schools Council announced it would be taking legal action in the form of seeking a judicial review of the policy change [16]. Their argument is expected to focus primarily on children with SEND (Special Educational Needs and Disabilities) support being unfairly impacted. The ISC estimates there are 110,000 in the private sector, of which 7,600 have an Education, Health, and Care Plan (EHCP) and their fees are mostly paid for by the state [17].

To help put this into perspective, in 2024, around 1.67 million students in England’s state sector need some level of SEND support. It represents 18.4% of the total student population, with an associated cost of £10.54 billion [18]. This group includes over 434,000 students with EHCPs, reflecting an 11.6% increase from 2023. The remaining 1.24 million students receiving SEND support without an EHCP was up 4.7% from the previous year [19].

From 1st January, 2025, VAT is scheduled to be due on tuition and boarding fees, and, from April, the relief on business rates will end. The Government calculates an extra £460m to spend on state sector schools next year.

notes & sources:

1. Gov.uk, 2024

2. The Times, June 2024

3. We are using ‘Full-Time Equivalent Pupil’ where possible. Most recent available data for State: England, Scotland, Wales, N. Ireland. For Independent schools: conflicting numbers seem to be quoted across the media, but these are the sources used England, Sco, Wales, N.Ireland (Northern Ireland has a very low number of schools with a comparable designation to the private schools elsewhere in the UK). There are approximately 75,000 international students in the private school sector. 62,708 are in member schools of the Independent Schools Council (ISC) which represents ~80% of the private sector.

4. This results from an effective VAT rate of 15% after allowing for input deductions, likely VAT on boarding fees and exemptions for specialist provision. It also includes extra revenues from business rates (IFS report, July 2023), and uptick for 2024 fees increase (Labour Manifesto, 2024).

5. Education Hub, gov .uk, March 2024

6. Tes Magazine, 2004

7. Department for Education SEND statistics, 2024.

8. In terms of the overall amount of tax revenue raised, the Institute of Fiscal Studies (IFS) argues that it will remain unchanged because parents who opt out of the private sector will simply spend that money on other products and services, thereby generating extra VAT revenues. IFS report, July 2023.

9. IFS report, July 2023. Civitas: Institute for the Study of Civil Society put the real-terms fee increase even higher (77% for day pupils, 66% for boarding) for the period 2000-2022.

10. Since 2003 the comparable average % wage growth has been close to zero, ONS data, 2023 

11. The largest decline being 4.6% for Year 7 (the first year of secondary school). Also smaller, lower fee schools saw a larger avg drop (3.2%), than the larger, more expensive schools. It should be noted that this is before the tax change has come into effect. The ISC did not make clear whether the potential introduction of VAT was, in its view, wholly responsible for the drop, The Times, Oct 2024.

12. DofE school capacity data, 2024.

13. DofE school applications data, 2024.

14. Note: in London there is more diversity of choice, and parents can usually name a preference list of up to 6 schools.

15. After 2012, the birth rate began to decline consistently. According to the Office for National Statistics (ONS), the general fertility rate fell from around 1.92 children per woman in 2012 to 1.58 in 2021, one of the lowest levels recorded. That drop is now being seen in secondary schools. National pupil projections.

16. The Times, 31/10/24

17. A Local Education Authority needs to agree that a pupil’s needs can only be met by the private sector for an ECHP to be funded.

18. National Funding Formulae, DofE, 2024-25 Budget.

19. Department for Education SEND statistics, 2024.