Giving a child a private education is far from cheap – and could be about to get a lot more expensive. Parents can already expect to spend around £18,000 a year for day schools, or £43,000 for boarding.
With the election looming, Labour has pledged to impose VAT on private school fees if it wins, instantly lifting prices by 20 per cent. Scrapping the current VAT exemption will raise about £1.5 billion, according to Labour, which it plans to use to boost funding for state schools.
Understandably, the move is causing panic among private school parents.
Parents can already expect to spend around £18,000 a year for day schools, or £43,000 for boarding - it costs £47,535 to board at Charterhouse School in Surrey, pictured
'Even before the prospect of VAT being imposed emerged, rising fees have been causing many to think twice about sending their children to private school,' says Carl Green, financial planning director at wealth management firm Evelyn Partners. 'But a 20 per cent tax would be a deal-breaker for many more.'
There is, however, a range of ways that parents can shrink the bill.
1. Paying fees in advance
This requires a considerable lump sum – nothing short of tens of thousands of pounds – but can lead to significant savings. The discount generally ranges from two to five per cent, depending on the school and how much you pay upfront.
Most independent schools are registered charities, which means they can place their money in low-risk investments and not pay tax on the returns. So they can invest the money for a bigger return than you would receive after tax. They then split that benefit with you.
2. Offshore bonds that can pay by the term
Investment bonds issued by companies outside the UK can be a tax efficient way to pay school fees.
The benefit is that the investment can usually grow largely free of tax, boosting returns.
Parents can set one up and name themselves as trustees and their children as beneficiaries.
The bond is then split up into several different policies – enough to cover each term's fees. When it pays out, the tax on the gain will be payable by your child rather than you. This means your child's tax allowances and tax rate – which tends to be lower – will be used, reducing the tax bill.
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3. A lump sum from your pension
You can take a quarter of your pension pot as a tax-free lump sum when you reach 55, which can be a tax efficient way of paying fees. Plus there is tax relief on the pension contributions in the first place.
However, as this money may become available a little late in life for school fees, another option is for a grandparent to gift their pension lump sum.
This adds another tax benefit as – provided they live for seven years after the gift has been made – it could also reduce a future inheritance tax bill.
4. 'Gifts' that avoid inheritance tax
If you, or the child's grandparents, are worried about inheritance tax, paying school fees can be a great solution. Regular gifts from income are exempt from inheritance tax, provided they don't impact your standard of living.
Let's say your annual income is £50,000 but you need only £40,000 to get by – the remaining £10,000 could help with school fees and, in doing so, pass on your estate in a tax-efficient way.
5. Make the most of bursaries
Over a third of private school pupils receive some form of financial assistance from the school, according to the Independent Schools Council.
Bursaries are offered to lower-income families, and mean they either pay reduced fees or nothing at all. These bursaries are means-tested and the criteria varies from school to school.
Over a third of private school pupils receive some form of financial assistance from the school, according to the Independent Schools Council
6. Scholarships that are open to anyone
Unlike bursaries, scholarships are not aimed at lower-income families, so anyone can apply.
They are designed to help particularly talented children get the best possible education. If your child is gifted academically, or in sports, music or arts, it is worth researching scholarships.
They typically cut fees by around 10 per cent, but can be awarded alongside a bursary.
When choosing a school, compile a shortlist then find out from each one which scholarships your child might be eligible for.
7. Set up a family firm that pays out dividends
If your child has wealthy grandparents who want to help with education costs, they could set up a family business and name your children as shareholders. They would then put income-generating assets in the business – perhaps a property or shares.
When school fees are due, the business would pay out a special dividend to cover the costs. The dividend would be taxed using the child's tax allowances and tax rate, which is likely to be lower than their grandparents' rate.
Parents should not do this as there are rules to prevent them from trying to take advantage of a child's tax status for their own gain.
8. Check for increased discounts for siblings
Many private schools offer a sibling discount. For example, Clifton College in Bristol offers a five per cent discount for the second child, 20 per cent for a third and 50 per cent for a fourth or more.
There may also be discounts for children of members of the Armed Forces, private school teachers and members of the clergy. These reductions are rarely advertised so make sure you ask.
9. Shop around for deals close to home
Fees can vary enormously from school to school. 'It may be worth looking at day attendance where possible as opposed to boarding,' says Alexandra Loydon, director of partner engagement and consultancy at St James's Place.
10. Focus on the most crucial school years
Consider combining state and private education so you can focus your funds on the most significant school years. You could send your child to state school for their primary and early secondary years, then pay for private education for their GCSE and A-level years.
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