If you’ve got your heart set on a private education for your children – or grandchildren – you’re going to need deeper pockets than ever.

The average cost is currently £5,552 a term for a private day school, according to the Independent Schools Council. That’s more than £16,600 a year just for one child. If you want your child to board, the costs are even greater at more than £39,000 a year.

But those costs are likely to swell even further in the coming months. Melanie Sanderson, managing editor of The Good Schools Guide, says: ‘An independent education is expensive and it’s only going to get more so now a Labour government is in power and set on adding VAT to school fees. In recent years we’ve already seen annual fee increases of anywhere between four and 10%. With VAT on its way, parents can expect the cost of a private education to jump by even bigger proportions.’

The government outlined its plans in a report published in late July, which proposed: ‘As of 1 January 2025, all education services and vocational training supplied by a private school, or a ‘connected person’, for a charge will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.’

It added: ‘Any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.’ The full details of these changes will be confirmed at the Budget held on 30 October.

While the planned increases will undoubtedly panic many parents who already have children in private school, those with younger children, do at least have some time to prepare.

Plan ahead

The earlier you start financial planning for school fees the better. It’s key to run the figures to ensure there are sufficient funds to stay the course. And you’ll need to factor in all the extras like uniform, sports kits, trips, equipment, music lessons and even exams.

The right savings and investment strategy over the years could go a long way in helping you achieve your goal and the more time you have, the more you’ll benefit from the compounding of returns. But you will also have to think about cashflow planning to make sure you always have the money to pay the bills – and in many cases it may make sense to take professional advice.

Use your property

If you don’t have the income or capital to pay for school fees, but you can easily afford your mortgage, borrowing against your home by remortgaging could be an option. This may be a particularly appealing option for those who have enjoyed significant house price increases in recent years.

You just need to be mindful that your repayments will go up (unless you lengthen the term) and that lenders will consider your school fees in your affordability assessment to ensure you aren’t over-stretching yourself. It’s worth talking your options through with a broker though – some lenders will have a more flexible approach to school fees than others.

They might also be able to discuss additional options with you. If you borrow a lump sum, for example, you could hold that in an offset mortgage, to reduce the amount of interest you pay on your mortgage, until you need it.

How grandparents can help – paying school fees can ease inheritance tax woes

For grandparents, the most straightforward way to reduce the amount of IHT their loved ones pay is to start giving away money they won’t need. The less money over the nil rate band, the lower the tax bill will be. By gifting surplus money now, beneficiaries will get its full value, rather than losing 40% to tax, if they only get it upon death.

So, if you’re a grandparent, helping with school fees can kill two birds with one stone: reducing your IHT bill and giving you the chance to see your grandchildren benefit from your wealth.

IHT gifting rules

IHT gifting rules mean you can’t necessarily give away as much money as you would like but there are a number of allowances to take advantage of. These can help whether grandparents are paying all the school fees or making a contribution:

Even if these allowances aren’t enough to cover the full scope of gifting, there may still be no IHT to pay. That’s because any gifts you make in excess of the permitted allowances are considered to be ‘potentially exempt transfers’ and subject to the seven-year rule.

This means that if a person lives for at least seven years after making the gift, it will be considered as wholly out of their estate and won’t be subject to any IHT.

A family affair

Growing numbers of grandparents and other wealthy family members are helping out with school fees. On top of the IHT benefits, many grandparents, great aunts and uncles, like being able to help – especially if they went, or sent their own children, to private school.

But before they make any grand gestures, its essential grandparents consider their commitment carefully. On top of their contribution, they need to think about what they would do if more grandchildren came along, for example.

Sanderson adds: ‘One of the dangers of making lifetime gifts is handing over money, only to regret it later in life. The key is to give away what you can afford to, when you can afford to.’

For these reasons, it’s often a good idea to get professional advice. This will help generous grandparents work out what they can afford to contribute and ensure any gifts are made in the most tax-efficient way.

Explore discounts and support

As a final step, when you’re exploring schools, it’s worth looking at whether your child could be eligible for a bursary or scholarship. According to The Good Schools Guide, roughly a third of pupils get financial support of some kind.

Scholarships might be offered to children who excel in sports, music or the arts. Bursaries, meanwhile, provide means-tested support for children who are a good fit for the school, but whose parents can’t afford the full fees.

However, while a bursary could save you thousands of pounds, you need to be prepared to have your finances and spending put under the microscope. Schools will want to see that families are deserving and that parents are making sacrifices to pay fees.

Sanderson adds: ‘It is not yet clear if the introduction of VAT on independent school fees will impact their scholarship and bursary offerings. What is sure, is that the picture will be different across the diverse private sector landscape. We advise parents to do their due diligence into the financial situation of all the schools they are considering and talk openly with the bursars to understand their options.’

There’s support if you need it

Careful planning is so important when it comes to looking after your family , planning for school fees and ensuring that you and your loved ones get the maximum benefit from that wealth – both in your lifetime and beyond.

If you don’t already have a planner, getting professional financial advice can help get your affairs in order. While there’s generally a charge for advice services, this could pay for itself in the long run by way of improved returns on your money, tax savings and, importantly, peace of mind.

Find out how abrdn's financial planning services could help you make the most of your tax allowances.

This content is based on an article by Rachel Lacey for ii.

The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on abrdn’s understanding in September 2024.