Private School Fees and Taxes Explained

Private School Fees and Taxes Explained

We all want the best for our children. We want them to grow to be independent, to develop character, to live a healthy lifestyle, and to leave their mark on the world. For many parents, a good education is at the top of the list of things they wish their children could have. Unfortunately, the best schools often come with a hefty price tag.

With the average cost of tuition from an independent school being around £17,200, not including the additional costs of boarding, uniforms, textbooks, and more, no wonder some parents feel private school is an impossible goal. Fees are continuing to rise yearly, outpacing the average yearly rise in income. These increases can make it challenging for even well-off families with high paying jobs to ensure their child’s education in a private school. The situation becomes even more challenging if they have more than one child.

Are Private School Fees Tax Deductible?

Taxes play a huge part in a financial venture so this is something that parents should be informed about before making investments. Unfortunately, no, private school fees are not specifically deductible from your self-assessment tax return. However, there are several tax efficient steps you can take to reduce the cost of private school fees for your children. We will explore a few options here.

There Are Options for You

  1. Use a Family Business: This works best if there is already an established business. However, it could still be a good option if the grandparents of the child arewilling to create one to help with their grandchild’s education. It is important that the grandparents are the ones who create the business and name their grandchildren as shareholders. When dividends are paid to the children, they can take advantage of their tax allowance. Up to £12,500 of the money is tax free as long as they are not employed.

    If a business has not already been established, it does not mean that Grandma and Granddad need to open a restaurant or develop a clothing line. The business could consist of simple investments, real estate, etc. Once more, it is important that the business is established by the grandparents! If the parents set up the business and name their children as shareholders, the dividends will still be taxed. This is becauseit could be seen as benefiting the parent more than the child. The startup costs could be high, so have a careful look at the plan before putting it into motion.

  2. Pay in Advance: This option is not very accessible to most, but it could be an option for some who have a large cash amount saved up. This could involve paying for a full term up front or even several years of education in advance. Though the amount will be hefty, it could save you from potential inflation or rising fees in yearsto come. The reason this works, even if you are only paying a term in advance, is because the school can use their charitable status to invest the money while avoiding the capital gains tax on the returns.

    The net returns for the investment will be much greater than if a parent invested the money and had to pay high tax rates on it. Theschool benefits as they are able to keep some of this income, but they also pass some of it on to you in the form of a discount. Talk with the school about what kinds of discounts they offer for payment in advance if this option is doable for you.

  3. Take Advantage of the ISA Allowance: Parents can use their Independent Savings Account allowance to grow and later withdraw their money without the tax charge. There is a cap to how much money can be invested this way, currently around £20,000. Look for a good annual growth rate and invest consistently for best results.

  4. Setting Up an Offshore Investment: This is another investment that will require the help of the grandparents. Parents will not be able to name their children as beneficiaries without being taxed. This is to prevent avoidance of the tax for the parent’s benefit instead of the child’s. If the grandparents appoint themselves as trustees and their grandchildren as beneficiaries, they can divide the bond into different policies to cover school fees, whether monthly, per term, or yearly. They can also include policies to cover the amount needed for books and equipment each year. As long as the gain falls under the tax allowance amount (£12,500), it will not be taxed if it is in the child’s name.

    The earlier Grandma and Grandad begin to invest before school fees need to be paid, the better. Begin this kind of planning years in advance and talk with a financial advisor to make sure your family is making a sound investment.

  5. Take Money from Your Pension: This option will be dependent on the age of the parents. For most people, when they reach 55, they are allowed to withdraw 25% of their pension in a lump sum that is tax free. If the timing is right for your child to begin attending a private school, this could be a great way to pay for a private education by taking advantage of the tax-free option. However, it would be wise to seek financial advice to make sure you have enough reserved for retirement.

    If the timing is not quite right to be able to use your pension, you might be able to refinance your house or take out some other kind of loan to pay for the school fees if you will be able to access your pension soon to pay back the mortgage or loan. Consider interest rates though before determining if this is the best option for you.

  6. Get Grandparent Help: One thing is for certain; education is a family affair. Here is another suggestion that requires help from the older generation but could be a great option for them to know they are helping their grandchild with this important part of their life. Helping their grandchildren succeed in private school by covering the fees could be an enduring legacy. Grandparents can set up a startup fund which they can manage.

    The money distributed from the estate of someone who has passed away, can be taxed up to 40% beyond a certain limit. However, there are annual exemptions allowed for money that can be given each year without incurring a tax. Each grandparent can give up to £3,000 a year which will not be taxed under the Inheritance tax rules.

    Certain regular gifts will be inheritance tax free if the donor survives more than seven years after it is given. These options could end up not only helping the child, but also helping the grandparents and parents get affairs in order more easily to theadvantage of the whole family.

  7. Consider Scholarship and Bursary Options: Many of the options we have listed above require at least some capital to invest or assume some generational family wealth. However, even without these things, there are still ways to help alleviate the costs associated with private school. Nearly all schools offer scholarship and bursary options. Scholarships are usually merit based and awarded to students who demonstrate a high level of academic achievement or advancement in a specific area like an athletic sport, a musical instrument, dance, etc. If your child performs well in school or has a gifting in a specific area, a scholarship might be a good option for them.

    Bursaries are most often awarded based on need. If private school fees would a huge financial burden on your family, you may be eligible for a bursary. There are also other factors other than financial considered when awarding bursaries, such as nationality, gender, the place you live, special circumstances such as the death of a parent, and more. It is worth doing some investigating to see if your child will qualify for a bursary offered through the school of your choice.

    Many schools offer financial assistance to children who already have a sibling enrolled in the school. They may also award scholarships to children whose parents are in the clergy or military, or who are teachers in private schools. You never know what an individual school may award. Even if it is not advertised, it is worth it to ask.

  8. Create a Combo: You may be able to cover tuition fees using a combination ofthese suggestions. Just remember that it is often worth it to hire a financial advisor or lawyer to help you make the best decisions for both you and your child’s future. Risky investments or uninformed decisions could put a quick end to your hopes of private school.

Before You Dive In…

Before you begin any of these lengthy processes, remember to do your research thoroughly. Not only should you carefully research financial and tax details (we would recommend seeking legal help for this), but also make sure your family is on the same page about your educational goals for your child. Though private schools can be excellent institutions for nurturing a child’s love of learning, they are not for everyone.

If an independent school does seem like the best situation for your child, carefully determine which schools are your top choices and also consider at what point they should enter. For some students, beginning a private education in grammar school may be best, others might wait to transition later. Where you live might increase your child’s opportunity of going to a good grammar school that can feed into a desirable preparatory school. Other parents will want to save as much money as possible at a state school until the more crucial years as students begin to prepare for university.

Knowing your options and making wise investments can help offset some of the costs of a private education. Knowing your child has received the best education possible while your family has been able to weather the tuition fees successfully is something you will never regret.