For many, the thought of paying school fees for five, ten or even fifteen years looms on the horizon like an insurmountable mountain to climb. Heated discussions can ensue about which schools you should apply to, whether your children should board or not, or even whether private school is the right choice.
As you start to juggle the figures, family holidays, a new car and funding your own retirement can start to feel like inevitable sacrifices. And what about university fees after that? (In a previous blog, I looked at how to best pay for tuition fees which have risen to £9,250 per year).
This all begs the question: how much do you need to earn to afford private school for your children, and what is the best way to fund it?
The Cost of a Private Education
After the purchase of your home, your children’s education may be one of the costliest expenses you’ll ever face. In 2018, the Independent Schools Council Annual Census reported on the average boarding fees per term in the UK (collated from ISC-member senior boarding schools). The average annual cost for a senior-aged pupil was £33,000, and that figure doesn’t include the extras needed for activities such as sport, music, art and the cost of uniforms and school trips. These are likely to add further thousands to the annual bill.
Below are average fees per term, which must be multiplied by three terms for annual costs.
| Age group | Boarding fee | Day fee (boarding schools) | Day fee (day schools) | Day fee (average) | Overall average fee |
|---|---|---|---|---|---|
| Sixth form | £11,821 | £7,056 | £5,022 | £5,475 | £7,631 |
| Senior | £11,001 | £6,516 | £4,862 | £5,168 | £6,122 |
| Junior | £8,243 | £4,927 | £4,291 | £4,342 | £4,409 |
| Overall average | £11,228 | £6,250 | £4,618 | £4,854 | £5,744 |
| Change on previous year | +4.3% | +2.9% | +3.4% | +3.3% | +3.4% |
Source: ISC Census and Annual Report 2018
School fees (excluding nursery fees). Figures represent average weighted fees per term. Average fee figures are based on fees at schools completing the Census in 2018; percentage change is calculated from the change among the 1,283 schools completing the Census in both 2017 and 2018.
Annual Increases
Private school fees have more than trebled since the 1990s when many of us were at school. In recent years they have increased at an average rate of 5-6% per year. The good news (if there is any) is that, according to the ISC 2018 report, the average overall fees only increased by 3.4% between 2017 and 2018. However, we can’t assume that future increase rates will remain that low.
Make Savings Where You Can
It’s worth noting that fees vary widely from school to school and from region to region – the South West of England has the highest, followed by the South East and then Greater London, with the North West having some of the lowest fees. So if you can be flexible about location, this has the potential to save you a considerable amount.
Fees are normally payable termly in advance, although different schools may offer different payment options (including monthly Direct Debit payments).
Some schools will offer a discount if you have more than one child at the school. Of course, this must be weighed up against whether it’s best for siblings to attend the same school. You may feel that your children need different schools to achieve their best.
Scholarships and Bursaries
Scholarship and bursaries will vary from school to school and provide anything from a 5% to 80% contribution, although the lower rates are more common. In some cases, scholarships or exhibition awards may provide lessons and additional travel expenses rather than tuition. Larger schools that attract international students are often the most competitive for scholarships. The income threshold for bursaries can be surprisingly low, although it’s always worth investigating your options with the admissions department.
How to Fund Private School: A Case Study
Let’s take the example of a family with two children, two years apart, whose parents want them both to board at private school for five years, through GCSEs and A levels. The mother doesn’t work and the father earns £125,000 a year. Both sets of grandparents are reasonably well off and may be able to offer some assistance.
Option 1: Paying out of Income
With a salary of £125,000, the family have an estimated net monthly income of £6,3371. If paid monthly, the annual £30,003 school fees for a senior boarder (see table above) come to £2,750 per month for the first child. When the second child starts at private school, this amount will double to £5,500, leaving the family with just £837. It clearly can’t be done.
Even for those on a salary of £150,000 (estimated net £7,545 per month1), with two children at private school their monthly funds will be £2,045, which is likely to be an unrealistic amount for most reasonably well-off families with a family home and cars to run.
Paying school fees from your monthly income is the most expensive approach, as neither tax relief nor salary sacrifice are directly available. Better options would be to start saving and investing funds for school well in advance, or, if it’s already too late, getting support from family if this is possible.
Option 2: Saving and Investing Ahead
Spreading the cost of school fees over more years by saving from an early age is a more manageable option. Suitable investment vehicles are available and, if well-chosen and managed, they could provide more promising returns.
Once again, let’s assume our case study parents are still facing annual school fees which are £33,003 per child at the time they start saving, and are increasing at 5% per year. If the family were to begin saving and investing five years in advance into a suitable portfolio and achieved an annual return of 5% on their investments, the impact of fees could be significantly reduced, as shown below.
| Year | Monthly investment | Annual school fees |
|---|---|---|
| 1 | 2,295 | 0 |
| 2 | 2,295 | 0 |
| 3 | 2,295 | 0 |
| 4 | 2,295 | 0 |
| 5 | 2,295 | 0 |
| 6 | 1,704 | 42,121 |
| 7 | 1,199 | 44,227 |
| 8 | 757 | 46,439 |
| 9 | 360 | 48,760 |
| 10 | 0 | 51,198 |
The result of the above is a total invested amount of £185,958 per child with the total cost of education of £232,746 – the investment returns fund the difference. It’s still not a breeze, but it’s a lot more doable than paying on demand out of taxed income.
If the family were to start saving even earlier, perhaps when their child was born, 10 years in advance of school fees beginning, the monthly investments could be reduced significantly further, as shown below, assuming other rates remained the same:
| Year | Monthly investment | Annual school fees |
|---|---|---|
| 1 | 1,460 | 0 |
| 2 | 1,460 | 0 |
| 3 | 1,460 | 0 |
| 4 | 1,460 | 0 |
| 5 | 1,460 | 0 |
| 6 | 1,460 | 0 |
| 7 | 1,460 | 0 |
| 8 | 1,460 | 0 |
| 9 | 1,460 | 0 |
| 10 | 1,460 | 0 |
| 11 | 1,129 | 53,758 |
| 12 | 820 | 56,446 |
| 13 | 531 | 59,269 |
| 14 | 259 | 62,232 |
| 15 | 0 | 65,344 |
The total of £208,110 invested would cover a total cost of education of £297,049.
Option 3: Capital Sum Outset
If our case study family are able to realise an investment, or if they receive an inheritance, they could invest the total lump sum. If they invest £100,000 at birth per child with compound interest at 5%, it could create a nest egg worth £162,889 at the start of junior school (i.e. after 10 years). It’s important to seek professional financial advice specific to your circumstances, as returns may be taxable. If you would like to speak to an adviser at Progeny, please feel free to contact us.
Option 4: Paying with Family Contributions
If you have parents or other family members that can help, school fees may be a way to reduce Inheritance Tax. The parents of our case study couple could consider the following IHT options:
- Grandparents could make lump sum gifts to help with school fees and, provided the grandparents live for at least 7 years after making the gift, the amount will not be included as part of their estate for the purposes of calculating IHT. The amount they can give is unlimited.
- Grandparents could give away up to £3,000 each year tax-free, using their annual gift allowance. This money will not be included in their estate when it comes to calculating Inheritance Tax liability, even if they die within 7 years. The amount may not sound much, but if you have four grandparents each contributing £3,000 a year, the £12,000 which results will at least put a dent in the school fees bill.
- Grandparents could regularly give away some of their income, but the gift must be regular and must leave them sufficient money to live on. Again, in these circumstances, the amount given away will not count towards their estate for IHT purposes.
If you’re considering this option, it’s always important to take professional advice on any Inheritance Tax (IHT) implications and keep meticulous records. If you would like to speak to an adviser at Progeny, please feel free to contact us.
Conclusion
What should be clear from the above is that there are a number of different ways to fund school fees, most of which will be more affordable and tax efficient than trying to pay them from monthly income.
It’s impossible to plan or predict the precise costs or returns of investments, especially without proper details of your financial circumstances. In order to maximise any investment and minimise any risk or tax liabilities, you will require professional advice and assistance. However, what is clear is that with even a little forward planning it is possible to substantially mitigate the cost and impact of school fees.
If you would like to discuss any of the options above, please get in touch. We’d be delighted to help.
—
The calculations quoted in this article are for illustration purposes only.
Nothing in this article should be deemed to constitute the provision of financial, investment or other professional advice in any way. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
1 Based on paying Income Tax and National Insurance at 2019/20 rates and excluding any other deductions such as pension contributions.
