Can you claim tax relief on private school fees?

Are you planning on sending your children to private school? While everybody wants the best for their children, private education doesn’t come cheap, especially with Labour’s widely anticipated intention to remove the VAT exempt status. Therefore, we may expect that even households with higher incomes could struggle with the cost. So, if you’re wondering how to pay for private school education – you’re not alone.

When it comes to school fees planning you might have some questions. For example, can you claim tax relief on private school fees? Do private schools get government funding in the UK? Is a donation to a private school tax deductible? That’s where we can help. Keep reading to find out whether or not you can claim tax relief on private school fees, and how to reduce the costs.

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What is the average cost of private education?

Since the last Independent Schools Council (ISC) census, carried out in 2023, day school fees continued the steady upwards trend - rising by 5.8%. A day school costs on average £15,000 per year per child, depending on the area, while a boarding school is likely to cost over £39,000 per year. In comparison, the average yearly fee for a private day school in 2004 was just over £8,000. However, with the recent change in government, Labour have confirmed its intention to remove the VAT exempt status of private school fees. This could have far-reaching implications, with parents being required to pay VAT on fees, potentially increasing costs by 20%. Although this isn’t expected to take place until September 2025, it’s important to prepare early and evaluate your options.

Average fees per term in 2023 are as follows:

(Source: ISC Census and Annual Report 2023)

Do private schools get government funding in the UK?

Private schools do not get Government funding in the United Kingdom. While they have to be registered with the Government and get inspected on a regular basis, like any other school, they’re funded by school fees and gifts rather than the Government.

Most private schools in the UK have charitable status, allowing them to take advantage of various tax concessions – to be eligible, they must prove that they provide public benefit.

Is a donation to a private school tax deductible?

In short, no. However, there are ways to reduce private school fees while also paying less tax, easing the pressure. We’ve outlined some of them here, so that you can make the best decisions for your family.

Get grandparents involved

Grandparents might be willing to contribute as part of a broader effort towards intergenerational planning, particularly as doing so can reduce their estate’s value for inheritance tax purposes. If they give a gift, and survive for at least seven years after doing so, the gift will be free from inheritance tax. Meanwhile, grandparents can also make the most of their annual gift exemption of £3,000 or make regular gifts out of surplus income.

An alternative for grandparents who want to help out is to set up a Bare Trust. A Bare Trust is created when a gift is made into a savings or investment account, with the intention of creating a trust. In most cases, there are two adult trustees, while the child is the beneficiary. Of course, any gifts made to a Bare Trust will be exempt from inheritance tax if the gift giver survives for seven years, while the grandparents can also still contribute their annual gift exemption or regular gifts out of surplus income.
With a Bare Trust, any income or gains would be payable to the beneficiaries or children in this case, not the grandparents, which is likely to be within the child’s personal tax allowance.

Set up a family business

If you decide to go down this route, the grandparents will need to set up a family business and name the children as shareholders. You can then fund private school fees by paying out dividends to the children, which will be entirely tax free if it is within their tax allowance. If the children don’t have any additional income or earnings, they’ll be able to use their personal tax allowance, which stands at £12,570 per year for 2024/25 tax year.

Assets like property or investments, which generate income, can be allocated to the business by the grandparents. Remember, it needs to be the grandparents who create the business instead of the parents – when parents gift to children, it could incur a tax charge.

Use offshore bonds

Another option for parents or grandparents is to invest a lump sum in an offshore bond, naming themselves as the trustees and the children as the beneficiaries. It’s easy to split the bond into multiple policy segments, each one encashed to pay for private school fees each year or term. 

The policy segments can then be assigned to the children when they reach private school age via a Bare Trust. As a result – providing that the parents or grandparents have invested wisely and reviewed their investment on a regular basis – the tax on the gain would, in theory, be payable by the children. However, as it should be within their personal tax allowances, it ought to be tax free.

Use pension money

Under the current pension rules, at age 55 (57 from 6 April 2028), you’re able to take a quarter of your pension as a tax-free sum. As such, you may decide to use this sum to cover the cost of private school fees. In particular, this can make sense if you’re a higher or additional rate taxpayer, as you won’t have any additional tax to pay. Then, it’s possible to leave the rest of your pension invested so that you’re covered for income in retirement.

Of course, many people continue working past the age of 55, but you can take the lump sum even if you’re still working. By the time you’re 55, your children might be past school age too, but there’s even a way around this if you need to pay the fees while you are younger.

What you could do is increase your mortgage to pay for the school fees, and then, when you get to age 55, you can withdraw the lump sum from your pension, and pay it off. This is not a decision to take lightly however so it’s important to engage with a financial adviser before doing so, as it might not make financial sense.

Pay upfront

Another option for reducing the average cost of private education is to pay the fees upfront in a lump sum. It’s something many private schools will allow you to do, and it can save you money in the long run as private school fees can inflate relatively quickly.

Some schools will offer investment schemes, wherein parents pay a lump sum in advance which is then invested by the school into low-risk investments. Since private schools have charitable status, the returns on the investment will be tax-free. If you were to make the same investments yourself, you’d be in line for smaller returns because they wouldn’t be tax free. In fact, you might have to pay 40-45% tax.

In comparison, by paying private school fees upfront, you won’t have to pay any tax. Plus, not only will you benefit, but your child and their school will too. As you’ve paid upfront, you’ll be in line for a discount from the school, who will then keep what remains from the returns.

Summary

Dealing with tax relief on school fees – and keeping the costs down especially with the looming addition of VAT– can feel like a tricky task, but it doesn’t have to be. If you’re looking to make paying for private school fees a little easier, you can get in touch with The Private Office to arrange a free consultation.

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The details in this article are for information only and do not constitute individual advice.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The value of your investments can go down as well as up, so you could get back less than you invested.