How VAT on Private School Fees Could Affect Business Owners

As the Autumn Statement draws near, and rumours of various tax changes are gaining momentum, one significant change that we know will be taking place is VAT being applicable to private school and boarding school fees from 1 January 2025. Though the details of its implementation still feel up in the air somewhat, we explore how the introduction of VAT on school fees could affect business owners who send their children to private school or boarding school, and the tax-efficient strategies they can use to manage these rising costs.

VAT on Private School Fees: What Does It Mean for Business Owners?

Currently, private school fees in the UK are VAT exempt, but with the proposed change, a 20% VAT will be applied to all private school and boarding school fees starting on 1 January 2025. This will lead to a significant increase in the cost of education for parents. For example, if annual school fees are £30,000, an additional £6,000 in VAT will bring the total to £36,000. For boarding school fees, which are often much higher, the increase will be even steeper.

This additional financial burden could be particularly challenging for business owners who are already balancing personal and business-related expenses. To mitigate the impact, there may need to be an exploration of tax-efficient ways of funding school fees or reassess their overall financial planning.

Tax Considerations for Employers Paying School Fees

Business owners may consider paying school fees through their company, but there are important tax implications to be aware of:

• Employer Pays Directly: If a business pays an employee’s (or their own child’s) school fees directly, this is treated as a Benefit in Kind (BIK). The employee will be taxed on the value of the fees, and the employer will have to pay National Insurance Contributions (NIC) on the benefit. This approach offers little in terms of tax savings and increases both employer and employee tax liabilities.

• Employee Pays & Employer Reimburses: If the employee pays the school fees and the employer reimburses them, the payment is treated as earnings, which are subject to both income tax and NIC. Again, this is not tax efficient.

• Wholly & Exclusively Test: For expenses to reduce corporation tax, they must be “wholly and exclusively” for the purpose of the business. Since school fees are personal expenses, they do not meet this test, and therefore, they cannot be deducted as a business expense to reduce corporation tax.

Tax-Efficient Ways to Pay School Fees

With the upcoming VAT increase, business owners need to consider tax-efficient ways to cover school fees. Two of the most commonly used strategies include salary sacrifice and dividends.

1. Salary Sacrifice: In a salary sacrifice arrangement, an employee or business owner reduces their gross salary, and the sacrificed amount is used to pay school fees. While school fees are still included in total remuneration, this method can reduce the amount of National Insurance paid by both the employer and employee. However, the school fees are still taxable as a benefit.

2. Dividends: For business owners who are shareholders, paying school fees through dividends can be more tax efficient. Dividends are taxed at a lower rate than salary or Benefits in Kind, making them a better option for those with sufficient profits. Dividend tax rates start at 8.75% for basic-rate taxpayers and rise to 39.35% for additional-rate taxpayers, which is generally more favourable than paying fees through salary.

3. Advanced Planning Solutions: More complex, long-term strategies such as setting up trusts or investing in tax-efficient financial products may also provide ways to pay school fees more efficiently. These solutions, however, require careful planning and can be costly to establish.

In Conclusion: Preparing for January 2025 and Beyond

With the VAT on private school fees set to take effect from 1 January 2025, business owners need to act now to assess how this will affect their finances and explore tax-efficient ways to manage school fee payments. Using strategies such as salary sacrifice or dividends can help minimise tax liabilities, while we remain alert to any other or broader tax changes that may come into effect and impact long-term planning as a business owner.

Consulting with an accountant can provide personalised guidance on how to structure finances most effectively in light of these impending changes and a new tax landscape. If you’d like to discuss your business finances and our services, get in touch with us: 01677 424077 or info@streamlineaccountants.co.uk.