When and why is VAT being added to fees?

VAT is now being added to private school fees after new rules came into force on 1 January.

The government plans to spend the money raised on more teachers for state schools in England.

Private schools say they have already seen a drop in secondary school pupil numbers because of higher fees.

Value added tax (VAT) is one of the government’s main sources of income. It is payable on top of the purchase price of many goods or services and the standard rate is 20%.

Previously, private schools did not have to charge VAT on their fees because of an exemption for organisations providing education.

Private school fees are liable for 20% VAT from 1 January.

The government previously said the tax would apply to all payments made for the January term after 29 July 2024.

About half of England’s private schools are also charities, so receive an 80% reduction on business rates (taxes on properties used for commercial purposes).

Separate legislation will be introduced to remove this tax relief from April 2025, but plans to remove private schools’ charitable status have been dropped.

The removal of the VAT exemption is UK-wide, but each nation will decide how to spend the additional money received.

The government estimates that the policy will raise an extra £460m in 2024/25, rising to £1.7bn by 2029/30.

Chancellor Rachel Reeves said “every single penny” will go to state schools.

Labour has repeatedly pledged to use the money to recruit 6,500 new teachers for state schools in England.

Schools have been struggling to attract and retain qualified teachers for years, especially in subject areas like maths and science.

In October’s Budget, the government allocated different sources of funding to address other issues in schools, like crumbling buildings and a stretched system for pupils with special educational needs.

Private schools – sometimes called independent schools – charge fees for most students.

While some famous schools, like Eton and Harrow, charge about £50,000 a year, the average is about £15,000.

There are about 2,500 private schools in the UK, educating about 7% of all pupils, including about 570,000 in England.

Private schools have more freedom than government-funded state schools, and do not have to follow the national curriculum.

Some local authorities pay for children with special educational needs and disabilities (Send) to attend private schools.

Applying VAT does not necessarily mean fees will go up by 20%. Some private schools may decide to put up their fees more than others.

On average, the government expects fees to increase by around 10%.

The average cost of private school fees has risen by 55% since 2003, even without VAT, the Institute for Fiscal Studies (IFS) think tanks says.

However, the proportion of children being privately educated over the period has not fallen.

Campaigners had argued that VAT should not be added to fees for small faith schools, international schools or for families with children with special educational needs.

But only those with a local authority education, health and care plan (EHCP) which names the specific school will continue to be exempt.

The government says a grant to help cover boarding-school fees for children of military families is being increased to take account of rising charges.

The government does not expect a significant impact on the number of pupils attending private schools.

It estimates that around 37,000 students will move to the state sector over the long term, but believes class sizes will not increase.

It points to research by the IFS which says it would be possible for the state sector to “easily accommodate extra pupils” because overall student numbers are set to fall by 700,000 by 2030.

That drop is larger than the total number of children currently attending private schools.

However, pupil numbers are not falling by the same amount everywhere, so some individual state schools could face pressure on class sizes.

The Independent Schools Council (ISC), which represents more than 1,400 private schools, says some of its members reported a 4.6% fall in Year 7 pupils in September 2024.

The ISC believes the government has underestimated the level of pupil displacement that will be caused.

In October 2024, the organisation said it would press ahead with plans for a legal challenge against the policy. It argues the tax changes breach the European Convention on Human Rights on two counts: the prohibition of discrimination, and the right to education.

The Treasury said it would not comment on potential litigation.