Private schools could raise foreign pupil fees to offset VAT rise for UK parents

Private schools have begun discussions about charging overseas pupils more to help them fund the 20 per cent VAT due to be levied from January, i has learned.

Several sources in the independent sector have revealed that some schools are looking at “differential pricing” – inspired by the university model for foreign students – in the next six to 12 months.

The plans could help schools cushion the financial blow for UK parents after the introduction of Labour’s tax on their fees. They are an option for boarding schools, and day schools – which can use homestays to cater for overseas pupils.

The news comes as private schools across the country finalise decisions on how much of the 20 per cent VAT they can afford to absorb and how much they will increase fees.

Talks have been given added urgency by Rachel Reeves’s announcement last week that the policy would be introduced from January 2025 – eight months earlier than expected.

Labour has argued that the schools should be able to absorb the cost of the tax without passing it onto parents, and experts have told i that huge real-terms rises in their fees over the last 15 years should make that possible.

But that has not stopped independent sector head teachers and bursars casting around for other solutions.

A source at one prestigious UK public school told i that further extra hikes in fees for families based outside the UK was the “most obvious” way of raising cash for schools that have a large intake of international students.

They said several schools were preparing to increase fees for international students “in line with how university fees operate” over the next six to 12 months, because of the introduction of VAT.

“The deeper pockets of international families, especially in the USA, Middle East, China and Hong Kong will make this very achievable,” they said.

It will not be the first time differential pricing has operated in UK independent schools. Both Brighton College and Queen Ethelburga’s Collegiate – a North Yorkshire boarding school – already charge premiums for overseas pupils of several thousands.

More than £12k extra a year if you live abroad

Brighton College already charges differential fees depending on where parents live.
In 2024-25, UK pupils will be charged £17,510 per term for full boarding in year nine, increasing to £18,490 in year 12.

By contrast, international students will be charged £21,670 per term for full boarding in year nine, rising to £22,840 in year 13.

But as the idea becomes seen as a potential solution to Labour’s tax, the trend is expected to accelerate. Education consultant Neil Roskilly, who formerly served as the chief executive of the Independent Schools Association (ISA), said several schools were looking at “differential pricing” for overseas students.

He told i that charging overseas parents a different rate would have been “unheard of” a few years ago. But Labour’s introduction of the VAT policy had prompted conversations over how schools can remain “as affordable as possible”.

Falling pound means overseas parents ‘won’t be concerned’

“This is an obvious area for schools to look at if they have overseas pupils,” Mr Roskilly said. The falling value of the pound over the last decade had been “incredibly beneficial” for overseas parents and many “won’t be too concerned if a differential pricing structure comes in”, he added.

The Independent Schools Council (ISC) is also understood to be aware of several schools discussing the option. Both large and small private schools are among those that have high numbers of overseas pupils.

Mr Roskilly said schools with “huge reserves on their balance sheets and parents queuing up at their doors” were the least likely to need the new pricing structure to cope with VAT.

“Those are the schools that are going to happily survive this,” he added. “It’s the smaller local schools that are really worried about this because they don’t have huge reserves and their pricing structure is in line with what they can be afforded locally. That kind of school will suffer.”

Labour’s position has been that private schools should be able to absorb the extra cost of VAT. Sir Keir Starmer has previously said that the schools have “accommodated” lots of cost increases over the last 14 years, suggesting that they “don’t have to pass the cost on to parents”.

The Prime Minister says the money raised from ending their tax breaks is urgently needed to fund state schools and pay for 6,500 new expert teachers, more than 3,000 new nurseries, and mental health support for every school.

Private school fees rise by more than a fifth to £42k

The chart below illustrates Sir Keir Starmer’s case. It shows how independent school fees have shot up in the last decade – by just over 20 per cent, in real terms after accounting for inflation – at the same time as per-pupil day-to-day funding for state schools in England plummeted.

That does not take into account capital spending on state schools. But the second chart below – where both sets of data have been calculated by the Institute for Fiscal Studies (IFS) – does. And it illustrates how the funding gap between the two sectors nearly doubled in a decade.

The IFS, using a different measure of inflation to that used by i for the first chart, calculated that between 2010 and 2020, average private school fees saw a real terms 24 per cent increase, whereas state school spending in England over the same period dropped by 15 per cent.

In 2009-10, there was a £4,890 difference between state school spending and private school fees, but this almost doubled to a chasm of £9,030 by 2022-23, the think tank’s figures, and the graph above, show.

Sam Freedman, a senior fellow at the IFS, said this demonstrated that private schools can “absolutely” afford the VAT on fees – as long as they make the same “economies” that have been forced upon the state sector.

Mr Freedman, a policy adviser to Michael Gove when he was a Conservative education secretary, said state schools had cut back on staff, curriculum and extracurricular activities, whereas independent schools had been able to charge “above-inflation fees”.

‘Extravagant facilities show private schools can afford VAT’

He told i: “At the top end of the independent school market, you’ve seen them continuing to build very extravagant new facilities, and so on. If the private school sector absorbed most or all of the VAT increase, rather than passing it on, they would have to do some of the things the state sector have been doing for the last 15 years.”

Mr Freedman noted that there was a “wide range” of private schools but said “very few will pass on the full amount or they won’t do it all at once” so the increase is more manageable for parents.

Asked if private schools, generally, could afford the VAT, he said: “Absolutely they can afford it. If you look at staff-teacher ratios, for example, your average class size in the private sector is about half what it was in the state sector. Clearly, they have plenty of scope for making savings.”

However, he added: “They [private schools] have got to balance making savings with a perceived reduction in quality by parents which may mean they no longer want to use the school. So they’ve got to take into account that they’re competing with other private schools.”

Sarah Cunnane of the ISC – which represents 1,411 schools – told i that only a “minority” of schools would be able to absorb the VAT meaning most parents should expect fee increases.

‘99% of schools will pass on some of VAT cost to parents’

She admitted that “there will be schools that are in positions to absorb some or all of the VAT but they would be in the minority”.
Affordability would vary between schools, she added: “We don’t yet know what schools’ plans are. We know that a small minority of schools have said that they expect to be able to absorb the majority, if not all of the cost.

“But what we also know is that 99 per cent of schools have said that they will have to pass on at least some of the cost parents. But all schools are going to be mindful of keeping fees affordable for parents… I don’t think any school is going to pass on 20 per cent just for the sake of it.”

The source at the prestigious public school agreed that even elite institutions could not afford to absorb the entire 20 per cent. But a fee increase was unlikely to matter to their wealthy parents or the schools – which are often oversubscribed.

Mr Roskilly said most private schools had “done everything they can in recent years in order to make their fees so affordable to parents”. He said private school fees had been pushed up by high inflation, teacher pay rises in line with the state sector, and a “huge increase” in bursaries and scholarships.

And while state schools had been “underfunded” it “doesn’t necessarily follow that independent schools, therefore, have too much money”, argued Ms Cunnane.

“It means that independent schools have had some money, but the majority of them are not-for-profit organisations. So anything they do make would be invested back into education.”

Tax change could make rich schools even richer

It has been reported that the imposition of VAT could actually end up making some elite private schools, already benefiting from endowments and rich benefactors, even wealthier. Tax experts have said that once they become liable for VAT, they will be able to claw back hundreds of thousands on big building projects.

Examples that have been cited include a sports centre costing more than £20m, completed by Eton College in Windsor last year.

The suggestion is that the potential to get back the tax paid on such developments retrospectively combined with the fact that over-subscribed schools can choose to pass on the full VAT to wealthy parents without the fear of falling rolls, will just make rich schools richer.

Sources within the independent education sector have told i they think this could happen.

“It’s the schools who can afford to either absorb or pass on [the tax]; they have the luxury of choice there,” they said. “And if they lose parents they’ve got a waiting list… because of the brand associated with the school.

“It’s the smaller schools, again, who are going to be hit because they’re the ones who don’t have a lot of building projects going on, don’t have a lot of reclaims in the way of VAT.”

As far as the ISC is concerned, only “a handful” of private schools will be financially able to absorb the fees.

A Government spokesperson said: “We want to ensure all children have the best chance in life to succeed. Ending tax breaks on private schools will help to raise the revenue needed to fund our education priorities for next year, such as recruiting 6,500 new teachers.

“Normal VAT rules will apply to private schools, and the amount charged on fees and spent on improvements is a decision for the school.”