Back to school: lessons in planning for school fees
With a new academic year about to get underway it’s a good time to think about school fees and how best to plan for them if you are choosing to send your children to a fee-paying school.
Planning for school fees
In the UK, more than one in 20 school children are privately educated,1 with the Independent School Council (ISC) reporting that the average yearly fee for day school is around £15,000.
If you seek a private option, you are likely to have many questions such as, is it affordable and can I minimise tax? There are many aspects to consider, whether you are a parent or a grandparent who’d like to help.2
Here are some of the most frequently asked questions about school fees.
Can I afford to pay for private school?
This is on the face of it a simple question, but it’s important to project into the future. School fees rise typically faster than inflation and are currently increasing at a faster pace than any time in the last 20 years. 3 It can be a daunting prospect, especially with the growing cost of living and elevated mortgage rates. It makes sense to plan your finances with an expert to work out if your assumptions are reasonable.
The goal is to be confident that you can provide ‘continuous education’ for a child. This means avoiding the heart-breaking pressure to withdraw them from a fee-paying school because of financial shortfall. It is vital to forecast, build in contingency and regularly check that the plan remains on track. The best way of doing that is to develop a school fees plan.
What is a school fees plan?
School fees planning covers three major elements; short term cash flow resolution, tax efficient wealth generation and the assurance of continuous education. It can factor in lots of aspects, such as grandparent contributions and multiple children at various schools and is as flexible as you need it to be.
How can I pay for school fees in a more efficient way?
Approximately 80% of parents pay school fees directly from income, which may not be the most efficient way to meet these costs. Many people ask questions such as:
- Are school fees tax deductible?
- Can school fees be salary sacrificed?
Nowadays, tax relief on school fees is not directly available and salary sacrifice schemes do not apply. However, there are other ways to pay efficiently, by minimising or reclaiming tax.
Options may include:
- Taking advantage of tax breaks
- Looking into inheritance tax advantages for grandparents
- Trust fund options
You might also want to find out if the school offers discounts, scholarships, and bursaries that you could qualify for. Means-testing can be strict, but options are also available for children who demonstrate aptitude, for example in sport, maths or music.
Discounts are sometimes available for paying the fees in a lump sum ahead of the school year, or for having more than one child in the school.
How can I protect my school fees payments?
Life plans can be upset by major changes such as job loss, bereavement, ill health, or divorce. The last thing you want to worry about at a difficult time is whether you can keep paying the school fees.
Insurance plans are available that pay a monthly, tax-free amount in the event of death or critical illness. The cost of this cover varies depending on the level of benefit needed, your age and current health, but can be arranged to meet school fees.
When should I start planning for school fees?
The simple answer is now. The earlier you start, even if the child is a baby, the more you increase the savings potential. Taking a longer-term approach is also helpful to manage the challenging points when several children may be accessing education at the same time, by allowing time for savings to grow, spreading the cost and increasing the opportunities to apply tax planning.
That said, it’s never too late to put a plan in place and seek more efficient ways of paying for fees.
What about university fees?
The ISC found that over 95% of privately educated children choose to go to university, so it pays to plan for this cost too.4 A university fund can mean that your child avoids starting their independent life with an average of £45,000 debt.5 Similar principles apply as to planning for private education, including getting started as soon as possible, so it would be wise to consider this in your school fees plan.
How can grandparents help with school fees?
Many grandparents either partially or fully fund the cost of their grandchildren’s private education. There are various ways to go about it that you can explore with an advisor, and some bring tax benefits too.
- Each grandparent can gift up to £3,000 per year, with zero tax implications. This can help lower your inheritance tax (IHT) liability.
- A discretionary trust fund protects assets in the event of divorce or bankruptcy and can generate income to fund the fees in a flexible way. Income tax paid by trustees can often be claimed back using the child’s personal allowance.
- Using surplus cash to pay fees means that the tax payable reduces over time, and the gift becomes tax exempt after seven years.
- Making regular payments out of surplus income rather than capital, if you can prove you have enough to maintain your daily life, is a way of helping family and reducing inheritance tax. Gifts from surplus income, provided they meet certain criteria, are immediately exempt from IHT.
- A family investment company can be used by families as an alternative to family trusts.
- Other options to explore include using pension funds and releasing equity in the property.
What about sustainability?
Planning for a child’s thriving future can lead to thoughts about the planet they will rely on. The desire to invest in a way that avoids harm or supports sustainability is fundamental to Holden & Partners. We can help you to manage your finances in a way that reflects your values and ethics.
CASE STUDY
School fees for three children, a family approach
Parents Sarah and Asim have three children aged two, five and eight. They are looking to move them to a private school but are concerned about affordability into the future as their mortgage is large and Asim has some health concerns.
Sarah’s parents would also like to help but are unsure of the best way.
The grandparents can easily begin using their annual gift allowance of £3,000 a year each, which can go to straight to fees, and is tax exempt. For longer term planning, they decide to set up a discretionary trust (where the tax liable on any funds invested reduces from year three to seven, when it becomes exempt from tax).
For longer term planning, they decide to set up a discretionary trust (where the tax liable on any funds invested reduces from year three to seven, when it becomes exempt from tax). As the grandparents are jointly contributing to the trust, they could contribute up to the value of their nil rate bands (£325,000 each) without suffering an immediate 20% tax charge. After 7 years this then falls out of their estate completely and their nil rate bands are available to them again.
With some better use of tax structures including ISAs for their savings and investments, and a clearer understanding of how the grandparents can help, Sarah and Asim felt confident to commit to school fees, with the addition of an insurance policy in case Asim was unable to work in the future.
Should I seek advice on school fee planning?
Successful school fee planning is both complex and holistic – it must encompass the finances of the family and, sometimes, extended family if grandparents are involved. Because of the need to provide continuous education, it involves forecasting and regular reviews to make sure the plan remains on track.
At Holden & Partners, we can take the stress out of this, leaving you to focus on choosing the best possible school. We can identify the most effective strategy for you and your family, taking account of your personal circumstances, approach to risk and the most suitable tax efficient structures available, to suit your budget and requirements.
1. https://www.isc.co.uk/research/
2. https://www.isc.co.uk/media/9316/isc_census_2023_final.pdf
3. https://www.telegraph.co.uk/news/2023/08/08/private-school-fees-rise-fastest-pace-20-years-middle-class/
4. isc_census_2023_final.pdf
5. https://www.theguardian.com/education/2021/nov/25/largest-debt-amassed-by-student-in-england-is-189700