Labour’s policy to add VAT to school fees is likely to raise annual costs by an average of £2,700 for day pupils and £6,350 for boarders. Add in inflation-busting fee rises and before you know it, private education costs the same as a shiny new Hermès Birkin bag – or, for the more practical, a house.
Most private schools are starting to issue revised fee statements for next term, with VAT applied. They have a choice as to whether they pass on the VAT rise in full, and there is some disparity in the approach taken. Eton, for example, has passed on the rise in full, presumably concluding that its wealthy parent group can take the hit. Others have done more to mitigate the cost, often in the face of fuming parents. The Government’s initial estimate of a 15% average rise in fees seems about right.
That would take the average fees from £18,064 to £20,773 per annum for a day school pupil. For boarding schools, the average cost rises from £42,459 to £48,828. It also means that future percentage-based fee rises are based on a higher starting point, so every fee rise costs more. While a lucky few may be getting 15% wage rises, most of us are not, so inevitably these fee rises eat into household budgets.
While there are legal cases pending, parents may need to bow to the inevitable. Unfortunately, with private schools, parents are price-takers rather than price-makers. Most will not pull their children out of a school where they are happy, but will pull any trick possible instead to find the cash to keep them where they are. The best they can hope for is to make representations to the school to ensure that costs are being kept in check, and the impact is minimal.
It is also worth noting that the costs of not sending your child to private school may also increase. Houses in catchment areas for the best state schools may increase and those looking to move may need to factor in stamp duty – on a £1m home, stamp duty is £41,000 – enough to pay the rise in school fees several times over.
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What are the options for parents?
I say this very quietly, knowing that most parents will shake their fists, but the best tip is to plan ahead and start early.
If you know that you want to send your children to private school, starting to invest when they are born gives you a pot of cash that you can use to pay some or all of their school fees later down the line. £300 per month growing at 6% a year for a decade will give you a pot of almost £50,000. A good active fund may do even better. The Rathbone Global Opportunities fund, for example, has grown at 14.78% per year over the past decade. That would equate to a pot of £67,000.
If that doesn’t happen – and let’s face it, looking after a baby isn’t particularly compatible with financial planning – the chances are your approach will have been a bit more fluid. You may be paying the fees from a precarious mix of savings, salaries, debt, and generous relatives. The first thing you can do is make sure you’ve optimised any savings you do have to generate an income.
For example, do you have cash sitting around in low-interest savings accounts? Or a technology fund that pays no income? Switching out of these funds into a global or UK equity income fund can bring in a revenue stream that can help contribute to school fees. In the UK, the Schroder Income fund has a yield of over 5% and, importantly, that yield tends to grow over time, so can help protect you from future fee rises. Global equity income funds tend to pay a little less, but the Fidelity Global Dividend fund yields around 2.6% and will also see its income grow.
It is also important to make sure any savings are sheltered from tax, if possible. You can put up to £20,000 in an ISA each year. Any income generated from the investments held in an ISA will be free from income tax and capital gains tax (CGT). To put that in context, if you have £50,000 in an investment paying 5% per year in an ISA, you could receive £2,500. The same investment held outside an ISA would only leave you with £1,500 if you are a 40% taxpayer. Every little helps.
It is also worth getting friendly grandparents or godparents to contribute where possible. Grandparents can gift up to £3,000 per year each, no questions asked. It is also a handy inheritance tax planning tool. A recent survey by Killik & Co found that almost one-fifth of grandparents pay school fees for their grandchildren.
There is also a long list of things not to do. These mostly involve compromising your long-term financial security – so, taking on a lot of debt, reducing your pension payments (and, by extension, turning away valuable tax breaks and employer contributions) or paring your savings to zero.
Of course, you could just send your children to the local state school. By the end of it, you’d probably have saved yourself £500,000 or more for two kids. You could give them a share in the form of a deposit on a house, and have enough left over for first-class flights to the Caribbean. Or you could just buy that new handbag. The choice is yours.
Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
