VAT on Private Schools: The End of Accessible Education?

Introduction and Background

Following the Labour Party’s landslide victory in the 2024 General Election, it confirmed its manifesto promise to introduce a 20% VAT and end tax breaks on private schools starting from 1 January 2025.

Under earlier legislation, private schools were VAT exempt. Schedule 9, Group 6 of the Value Added Tax Act 1994 provides exemptions for the supply of educational services by an ‘eligible body’, covering most private schools. An eligible body is defined as (i) a body that does not distribute profits to members or shareholders, and (ii) a body that reinvests any profits made to support or improve provided services. Additionally, private schools with charitable status under the Charities Act 2011 are also VAT exempt, fulfilling the ‘public benefit requirement’. An institution must serve a purpose that is beneficial in a provable way (‘the benefit aspect’) and must bring benefit to the public while not providing personal advantage beyond what is incidental (the ‘public aspect’).

Conversely, Labour’s new policy removes the VAT exemption currently enjoyed by private schools, alongside the abolition of the business rates relief that provides an 80% discount for schools with charitable status. Despite a relatively low population, with approximately 6% of all school children in the UK attending private schools, the new measure will surely have implications for these institutions.

The Case For VAT on Private Schools

The government claims that the measure of VAT on private schools will help ‘raise revenue to support the public finances […] [for] the 94% of school children who attend state schools’; the Institute for Fiscal Studies (IFS) estimates this would raise around £1.6 billion in tax revenue annually. This means that wealth from top private schools could be redistributed to fund struggling state schools, thereby reducing the economic gap.

In 2022-23, the average private school fee per pupil in the UK was £15,200 in real terms, compared to £8,000 in state schools—a stark difference of £7,200 or 90%. This disparity reflects the disproportionate spending between private and state schools, with more opportunities provided to private school students. If the £1.6 billion could be directed towards state schools, this could address some of the inconsistencies in opportunities and create a more level playing field through greater funding for extra-curricular activities, smaller class sizes, better classroom facilities, and personalised additional support—benefits already enjoyed by private school students.

These advantages are reflected in university destinations, where 67.8% of private school students progressed to more selective universities in 2022-23, compared to only 34.2% of state school students. This can also be directly linked to occupational attainment, as private school alumni are more likely to secure high-level positions in later life: in 2019, they made up 39% of the government cabinet and 34% of company chairs listed in the FTSE index (the top 100 largest companies in the UK). This is not to suggest that the successes of these alumni are solely a result of their privileged background and not a result of their determination and hard work, but rather to recognise the advantageous environment that provided them a head-start over their state-educated counterparts.

The Case Against VAT on Private Schools

Despite a 20% increase in average private school fees since 2010, the percentage of pupils attending private schools has remained stable, decreasing from 7.1% in 2010 to 6.4% in 2022 (an approximate 10% decrease), indicating that the demand for private schools is relatively inelastic. This suggests that fee increases will disproportionately affect middle-income families, potentially limiting their access to private schools in the future if this measure is implemented.

The introduction of such a significant VAT on private schools is likely to cause some behavioural changes and have unintended consequences, particularly for middle-income families. While it is often claimed that parents of private school students are primarily ‘concentrated at the very top of the income and wealth distributions’, the reality is different—some are middle-income families who face considerable financial strain while prioritising high-quality education. This change has serious implications for social mobility, as many of these families invest in private schools as a means of improving life prospects.

These families typically earn too much to be eligible for full financial aid, unlike lower-income families who generally qualify for means-tested bursaries. Families earning under £20,000 are likely to receive a full bursary, while those earning around £70,000 may be eligible for discounts. As a result, middle-income families find themselves trapped between the social classes, able to afford necessities while missing out on the financial freedoms enjoyed by those in the upper class. Given that their incomes are not exceptionally high, they lack the financial flexibility to absorb the VAT. Meanwhile, wealthier families remain unaffected, as they can manage fee increases more easily without urgent behavioural changes.

The IFS estimates that applying an effective tax rate of 15% will see a fall in private school attendance rates by 3-7% (about 20,000 to 40,000 pupils), meaning a lower tax revenue than the previously estimated £1.6 billion. This means that state schools will have to accommodate for the influx of private school students, potentially leading to overcrowded classrooms that may undermine educational quality for existing state school students. Even though the extra revenue generated from VAT on private schools will be more than enough to cover the surge of state school enrolments (requiring £100-300 million extra), some schools are simply not well-equipped enough at the current moment to absorb so many new students. Further long-term hidden costs could be associated with this transfer, such as infrastructure development and support services, which are overlooked by more immediate costs. Besides, funding allocation to state schools will likely experience large delays given the complex administrative process of collection and redistribution, putting further strain on the system.

While elite private schools like Eton and Harrow often come to mind when discussing private schools, this perspective often disregards smaller schools that cater to students with special educational needs and disabilities (SEND). Although Labour claims the proposal would keep the VAT exemption for students with an Education, Health, and Care Plan (EHCP)—a document that outlines specific details of a child’s special educational needs and the support required—those who do not fulfil the requirements to obtain such document would still be subject to the increased fees. This poses risks for parents with SEND children in private schools who will be forced to move to state schools, which are often unable to meet their needs. This could reduce the quality of pastoral support available for vulnerable learners, leading to detrimental impacts on the child’s mental health and future development.

Conclusion

Therefore, while it could be true that the VAT measure on private schools may generate increased revenue for state schools in the short term, the long-term impacts could create backlash among certain lower-earning groups, while the ultra-wealthy—who are intended to be the ‘target’ group of the policy—may only experience minor impacts. Nevertheless, the impacts of Labour’s policy are not yet fully known and will require thorough oversight in the coming years to truly understand the implications on families and the economy.