Tax-efficient school fees planning

Parents always want the best for their children, and for many this means paying for a private school education. With research showing that independent school students in the UK outperform national and global averages academically, and that over 50% of students continue on to a Russell Group university, a private school education is often seen as an investment in a child’s future.

However, the privilege of attending a private school comes with a lofty price tag and school fees can be a significant financial burden. Indeed, a recent study1 found that 38% of private school parents had struggled to meet payment deadlines and that nearly 60% of parents were concerned that they might not be able to afford the fees in the future.

Ultimately, parents who plan to send their children to a private school need to start the financial planning process early. In this article, we will take a look at the current cost of a private school education in the UK, and explore some effective tax-efficient school fee saving strategies.

How much do private schools in the UK cost?

There is no doubt that private school fees in the UK are expensive. According to the 2019 Independent Schools Council (ISC) Census and Annual Report, the average fee for a private day school now stands at £4,763 per term, or around £14,300 on an annual basis. Naturally, boarding school fees are far higher than this and will cost parents around £11,600 per term.

Of course, these fees are just the beginning when it comes to education costs. Parents also need to consider the costs associated with school uniforms, school trips, sports activities, and music lessons. These extra costs can add up. Overall, parents can be looking at total costs of £150,000 to £200,000 per child for a private day school, and potentially twice that for a boarding school.

Parents should also be aware that school fees are continually rising and that in the past they have increased at a rate above UK inflation. Since 2010, UK school fees have increased at an annualised rate of 3.9% according to the ISC.

All things considered, these figures show just how important it is to begin planning for school fees early. If you plan ahead, you can give yourself five to ten years, or perhaps even longer, to build up a savings pot and this could make a big difference when school fees are due. Below, we look at how you can start saving for school fees in a tax-efficient way.  

School fee saving: the first steps

One of the first things to do when saving for school fees is to establish a regular savings plan. The earlier you put a savings plan in place, the more time you’ll have to build up your savings and take advantage of the power of compounding.

Early on in the process, it’s also important to consider your asset allocation. Given that interest rates on cash savings accounts remain low, savings accounts are not likely to be effective investments for those with multi-year investment horizons. You may be better off constructing a diversified portfolio that contains a broad range of assets and is designed to achieve growth over the targeted investment horizon. If you are unsure about how to structure your portfolio, it’s a good idea to speak to a financial planner.

Tax-efficient school fee savings strategies

Investing within a tax-efficient savings vehicle is also a smart idea when it comes to saving for school fees. For example, you may want to consider saving and investing within a Stocks & Shares ISA (individual savings account). In this type of account, all capital gains and income are tax free. Each adult now has an annual ISA allowance of £20,000 per year, meaning that a couple could potentially put £40,000 per year into ISAs for school fees. 

Strategies involving grandparents

There are also a number of tax-efficient strategies involving grandparents that you may wish to consider. For example, setting up a trust is one way that grandparents can pass on assets tax efficiently. Grandparents can also contribute to school fees by making a series of regular gifts to grandchildren out of excess after-tax retirement income. If the conditions for the inheritance tax exemption that is available for people with income that is surplus to their needs are met, the gifts will be exempt from inheritance tax. Smaller lump sum gifts from grandparents can also be an effective way of paying for school fees. Provided the gifts are under £3,000 per grandparent per year, these gifts will also be exempt from inheritance tax. You can find out more about how grandparents can help pay for school fees in our article: Educating the next generation.

Speaking to a financial planner

If you are uncertain about the best way to save for school fees, it’s a sensible idea to seek school fees advice from a financial planner. A financial planner will be able to assess your savings requirements and put together a tailored plan to help you achieve your school fee savings goals effectively.  

To find out more, or if you have any questions regarding school fees saving, don’t hesitate to request a call back.

Please note that any tax benefits will depend on your personal tax position and rules are subject to change. The value of investments can go down as well as up and you may get back less than you invested. This article is not intended to be an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.