We all want to give our children the best opportunities in life and for many parents, this means paying for a private school education, so school fees planning is critical. Independent schools tend to offer a first-class educational experience designed to help students reach their full potential, and research shows that the majority of students who attend these schools outperform national averages academically and continue on to top universities¹.
However, the costs associated with a private school education can present challenges for many people, even those on high incomes. According to the 2022 Independent Schools Council (ISC) Census and Annual Report, the average fee for an independent day school in the UK is now £5,218² per term, with the figure rising to £6,250 per term for day schools in London. These figures are before extras such as uniforms, lunches, and excursions, which can push the costs up further.
If there’s one takeaway here, it’s that those wishing to send their children to a private school should prepare for the fees well before they are due. With that in mind, here is our quick guide to school fees planning.
School fees planning: the first steps
The first step, when planning for school fees, is to budget in advance to understand the extent of the costs you’re likely to face. If you have two or three children at private school at once, you could potentially be looking at fees of £60,000 to £80,000 per year, so it’s important to think about how you will generate this kind of liquidity. At this stage of the process, it can be useful to run a cash flow model to understand how you will handle the expense.
It’s worth noting here that private school fees are constantly rising. Between 2010 and 2020, for example, independent school fees across the UK rose by nearly 4% per year³ on average. It’s crucial to factor this level of school fee inflation into your budget.
Saving and investing to plan for school fees
The next step is to start putting resources aside to build up a savings pot. Here, it’s smart to put a regular savings plan in place. The earlier you do this the better, as it will give you more time to compound your savings.
At this stage of the process, you should give some thought to the best asset allocation for your school fee savings. This will largely depend on your time horizon. If your children’s school fees will be due in the next few years, lower-risk investments such as high-interest savings accounts and fixed-term deposits are likely to be the best option for your savings when school fees planning.
If you have five years or longer before your fees are due, however, you may be able to invest in assets such as equities and commercial real estate, which are more volatile in nature but have historically generated stronger returns for investors over the long term.
If you are unsure about the best asset mix for your investments, it’s a good idea to speak to a financial adviser. An adviser will be able to assess your savings requirements and help you construct a portfolio that is suited to your needs, objectives, risk level and time horizon.
Tax-efficient school fees savings strategies
When planning for school fees, parents should also think about saving and investing for school fees tax-efficiently. In the UK, the difference between pre-tax and post-tax investment returns can be substantial, especially for high earners, who face high tax rates on both capital gains and income. However there a various ways to reduce tax for high income earners.
One strategy for parents to consider is saving and investing within a Stocks & Shares ISA. Within an ISA, all capital gains and income generated are tax-free. Meanwhile, money can be accessed at any time, meaning that parents can make penalty-free withdrawals whenever school fees are due. At present, every adult in the UK has an annual ISA allowance of £20,000 per year which means that a couple could potentially save up to £40,000 per year for school fees in two ISAs.
Tax-efficient school fees planning involving grandparents
It’s worth pointing out that grandparents who wish to help with school fee expenses can also do so in a tax-efficient manner.
Lump-sum gifts are one strategy for grandparents to consider. By making a gift for school fees, grandparents can reduce the value of their estate for Inheritance Tax (IHT) purposes. At present, each grandparent can gift up to £3,000 per tax year with no IHT consequences. However, larger sums of money can potentially be gifted free of IHT as long as the grandparent survives for seven years after making the gift. Grandparents may also be able to make use of the IHT exemption that’s available for those with surplus income.
When school fees planning, establishing a ‘bare trust’ is another strategy for grandparents to consider. With this type of trust, assets are held by the grandparent as a ‘trustee’ for the benefit of the grandchild who is the trust’s ‘beneficiary’, and assets are taxed as if they belong to the grandchild. This means that grandparents can take advantage of the grandchild’s annual personal tax allowance, which is currently £12,570.
How Bowmore can help with school fees planning
At Bowmore, we understand the challenges you face with this area of financial planning, and we can assist you in tackling them. Want to find out more about tax-efficient school fees planning? Get in touch with us today.
BOWMORE FINANCIAL PLANNING
PHONE 01275 462 469
• Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
• The Financial Conduct Authority does not regulate Estate Planning or Inheritance Tax Planning.
• The Financial Conduct Authority does not regulate cash flow Planning.
• Bowmore Financial Planning Ltd is not regulated to provide tax advice
• The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance
• The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future
[1] Independent Schools Council, 2019
[2] Independent Schools Council, 2021
[3] Independent Schools Council, 2022
