The Labour government’s policy to remove tax exemptions from private schools is due to come into force in January 2025, having been a central pledge in its election manifesto.
Currently, independent schools do not have to charge 20 per cent VAT on their fees because there is an exemption for the supply of education. Schools that are registered as charities also benefit from an 80 per cent discount on business rates.
Both of these exemptions are set to be withdrawn in the new year.
Education secretary Bridget Phillipson has been vocal about her desire to improve state education, which she says will be partly achieved through funds raised by the tax on independent schools.
“We will end private schools’ tax breaks to drive high and rising standards for the nine in 10 children who go to state schools,” Ms Phillipson said in a speech at the Labour Party Conference in September 2024.
However, groups from both the independent and the state school sector have voiced concerns about the consequences the policy may bring.
Here’s what we know so far about the government’s motives behind the policy, what other parts of education will be funded through the tax exemption removal and what the consequences of the policy may be for all areas of the education sector.
Why is Labour adding VAT onto private school fees?
In the Labour manifesto, the party said that lifting the VAT exemption from independent schools will raise investment for state school spending and boost school standards.
Despite criticism from the sector, the government has remained adamant that it is not an “attack” on private schools and Ms Phillipson believes that private schools can “seek to absorb” the VAT increase.
“State schools have had to make some really tough choices in recent years, and I think private schools might like to consider how they cut their cloth,” she said on The Rest Is Politics podcast earlier this year.
When will VAT on fees be introduced?
VAT will be added to private school fees from 1 January 2025. Exchequer secretary to the Treasury James Murray recently confirmed that the VAT charge will also apply to “pre-payments of fees” for terms starting in the new year.
Private schools will be able to register for VAT for education and boarding fees from 30 October 2024.
Private schools that are registered as charities will lose their charitable business rates relief from April 2025.
What impact with this have on the sector?
The Independent Schools Council (ISC), which represents more than 1,400 independent schools, has warned that school closures are “inevitable” due to parents taking their children out of school because of rising costs.
However, the Institute for Fiscal Studies (IFS) predicts that removing tax exemptions is likely to have a “relatively limited effect” on numbers attending private schools, estimating a 3-7 per cent reduction in numbers.
Some schools, such as Eton College, have announced that they will be passing on the full cost of the tax on fees. According to reports, the private boys’ school said in a letter to parents that it would raise fees by 20 per cent.
Other schools, such as Bolton School in the North West, are passing on only 5 per cent of the cost to parents.
A reduction in the numbers attending private schools would subsequently increase the numbers attending state schools, with IFS predicting the need for around £100-£300 million in extra state school spending per year.
The NASUWT teaching union has expressed fears about potential redundancies, warning that some teachers may be unable to secure a new post mid-year and could be “lost permanently” from teaching.
The union specifically warned about the policy’s impact on the “retention of experienced teachers”, and said that female teachers, who according to the ISC make up the majority of the independent sector workforce, would be particularly impacted.
How much will VAT on private school fees rise?
Labour’s manifesto estimated that the removal of private school tax exemptions will raise £1,510 million in 2028-29.
A report by the IFS has said the additional tax will generate between £1.3 billion and £1.5 billion a year.
How will the money be spent?
The Department for Education states that the money raised from VAT will “fund public services, including education”. According to Labour’s manifesto, this will include:
- Recruiting 6,500 new teachers in key subjects in state schools
- Increasing teacher and headteacher training
- Delivering work experience and careers advice for all young people
- Early language development in primary schools
- Ofsted reform
- Over 3,000 new nurseries
- Mental health support for every school
- Young Futures Hubs
Which parts of independent education are exempt from tax?
The Treasury has said that VAT will not be applied to the fees of pupils with an educational, health and care plan (EHCP) if it states that they need a local authority-funded place in a private school for specialist support and that this place can not be provided by mainstream state-funded education.
However, where parents and guardians choose to send their child with special educational needs or disabilities to a private school, VAT will be applied to their fees.
The tax also applies where pupils have an EHCP but the local authority has decided that a private school place is not necessary to meet their needs.
Treasury documents, published in October 2024, also provided details about which goods will be exempt from tax, such as school meals, books and stationery. HMRC said these goods are necessary for the delivery of education and are VAT-exempt.
How has the sector reacted?
The Association of School and College Leaders, the NASUWT and the ISC have all called on the government to delay the tax changes.
In a response to a Treasury consultation, both ASCL and ISC urged for the policy to be pushed back to September 2025, with ISC adding that it would be “more practical” for schools that have already set their budgets for the current academic year.
ASCL also warned that introducing the change in the middle of an academic year could “cause additional disruption”.
The ISC has expressed concerns with the latest round of Treasury guidance, calling it “poorly drafted” and warned that it “does not give schools the information they need to operate VAT from January”.
