The Labour party will introduce 20% VAT on private school fees to raise around £1.7bn, despite u-turning on its pledge to strip the sector of charitable status
Private schools across England could face a package of policies to remove certain tax exemptions if Labour were to win the next election, with the party planning to abolish ‘unfair tax breaks’ and redirect the money to state school spending.
Total fee income for all private schools across the UK was an estimated £10.2bn in 2022-23, according to analysis by the Institute for Fiscal Studies (IFS).
The move could raise around £1.7bn in extra tax revenue, which would be earmarked for an additional 2% in state school spending in England and Wales.
There are around 1,935 private schools in England and Wales, with 70% registered as charities, educating over 600,000 pupils. Currently, average private fees stand at £15,200 per year, while the most expensive schools, such as Eton College or Harrow cost about £50,000.
Under the current system, independent schools registered as charities can claim gift aid on donations and do not have to pay tax on annual profits. But, since 2006, they have had to demonstrate they were creating ‘public benefit’ to maintain this status.
Labour has backtracked on initial plans to end the charitable status of private schools saying it would no longer pursue this policy as the VAT on fees would raise sufficient funding, despite Labour leader Sir Keir Starmer setting out detailed plans in a speech last summer. The policy was in Labour’s 2019 manifesto.
A spokesperson for the Labour party said: ‘Our policy remains. We will remove the unfair tax breaks that private schools benefit from, to fund desperately needed teachers and mental health counselling in every secondary school.
‘This doesn’t require removing charitable status, however driving high and rising standards for every child against the backdrop of a broken economy requires political choices. Labour isn’t afraid to make them.’
There are around 600,000 pupils attending private schools in England and Wales currently, a figure that has hardly changed over the last 10 or 20 years.
The IFS estimated that Labour’s VAT policy could push up to 40,000 children out of private schools and into the state sector.
School fees account for about 15-20% of household income for those choosing private education. Adding an effective VAT rate of 15-20% on fees may therefore amount to 2-3% in extra costs for such families.
The IFS said: ‘We estimate that removing tax exemptions from private schools will likely raise about £1.6bn a year in overall extra tax revenues. This accounts for the deductibility of inputs, VAT on boarding fees, revenue raised from corporation tax and business rates, and exemptions for specialist provision.
‘Tax revenues are unlikely to change if pupils switch to the state sector as a result of any rise in post-tax fees. This is because any money saved on private school fees would likely be spent on other goods and services, with any reduction in VAT revenues from private school fees effectively cancelled out by increased revenues from VAT on other goods and services.
‘The big uncertainty on tax revenues is the potential for avoidance, with a need for any legislation to carefully consider the definition of private schooling to avoid unintended consequences.’