What’s changed since Labour added VAT to private school fees?

As we approach the new financial year, it’s a fitting time to reflect on the impact to the education sector of adding VAT to private school fees. We provide equipment leasing finance to both private and state schools here at Utility Rentals, so we will be exploring what this change means in practice for the sector as a whole.

In January 2025, the Labour government implemented its manifesto commitment to impose 20% VAT on private school fees and to remove their charitable status. The elimination of this long-standing tax exemption created a significant amount of speculation in the press about what would happen next.

This controversial policy change has now been in effect for nearly three months: enough time to analyse its initial impact on both the private and state education sectors and to start formulating some thoughts about the longer-term implications.

So, what – if anything – has changed since Labour added VAT to private school fees?

The policy explained

First, let’s examine the policy in more detail. There are two parts to it: applying the standard 20% VAT rate to private school fees as of January this year, and removing charitable business rates relief (which previously provided an 80% discount) from April.

The Treasury estimates it will raise £1.725 billion a year from these two tax changes, which the government says it will re-invest into the state sector, including funding for new nurseries, hiring 6,500 additional teachers, and improving mental health support in schools. Not everyone agrees with the figure, especially as it assumes no major increase in the number of children enrolled in state schools. Were there to be a big increase, part of this figure would have to be invested in educating these additional children.

It’s worth noting that parents aren’t necessarily being asked to absorb the full 20%. When announcing the policy, Labour predicted that fees would rise by an average of 10% as schools could absorb some costs by claiming back the VAT they pay for products and services (this would include VAT paid on leased equipment).

Not everyone agrees with this prediction, however: other studies put the premium between 14% and 18%. With the average private school charging £15,000 a year per child, this means parents are now paying around £1,500 – £3,000 extra per year. 

How many of these families have proven willing and able to do this?

No mass exodus to the state sector

Early evidence suggests that fears of a mass exodus from private to state schools were unfounded, although this doesn’t mean private schools aren’t facing increased financial pressure.

Local authorities across England report “no obvious impact” of the VAT change on applications for state sector places, and have actually reported increases in the numbers of families receiving their first choice of secondary school in 2025. The Press Association surveyed 70 local authorities and found that 44 had seen an increase in the proportion of pupils getting their first choice compared to last year.

In fact, despite inflammatory headlines in some areas of the press, The Institute for Fiscal Studies has maintained a fairly conservative estimate of just a 3-7% reduction in private school attendance. This isn’t enough to make a major impact on the educational landscape at a national level, although there are likely to be regional impacts, with some areas experiencing greater demand for state school places than others.

The data available so far strongly suggests that even if some families have chosen to send their children to state instead of private schools, this isn’t at a level high enough to cause problems for state school admissions.

Financial pressures in the private sector

While there hasn’t been a mass migration to state schools, private schools and colleges are experiencing a certain amount of financial pressure as a result of the tax changes.

Staff expenses typically represent around 70% of an independent school’s cost base, with energy, food, and facilities accounting for the rest. The additional tax burden comes at a time when these costs have already been rising significantly.

Even before the changes to VAT and business rates, private school fees had risen by 20% in real terms since 2020, to offset inflation and their increased running costs.

While it seems that many families with children in private education have opted to absorb the VAT charges rather than transfer to state schools, these figures do call into question the long-term sustainability of the private sector. Private schools will have to strike the balance between charging enough to cover their costs without raising fees so high they lose too many students. If the latter happens, schools are in danger of having to close their doors altogether.

The Utility Rentals view

Private schools may need to explore alternative revenue streams or cost-saving measures to offset the tax changes, especially if they are not passing on the full increase to parents. This may involve merging with other schools in the local area, reducing their offering, finding operational efficiencies, or a combination of all these things.

One efficiency could be to integrate equipment leasing into the private school business model. Rather than using up valuable capital budget to purchase the high quality equipment families expect, schools could instead lease the items they need and pay for them in affordable installments. This structure means schools can pay for IT equipment, kitchen equipment, hygiene equipment and more out of the revenue they earn from fees, without having to fund it all upfront and wait a period of years for the equipment to pay for itself.

We can finance everything from iPads and interactive screens to LED lighting and commercial dishwashers. Essentially, if you can put it in a school, we can fund it! You can see a full list of what we fund on our website. 

What’s next for private schools?

Three months after implementation, Labour’s policy to apply VAT to private school fees has not caused the level of chaos to the education system that critics feared. There is no evidence of an “exodus” to state schools, and many families appear to be absorbing the higher costs.

Nevertheless, the policy is creating financial pressures for private schools, and they are likely to need to adapt their business models in order to thrive in future. If they can do this, both the state and private sectors are likely to continue much in the same vein: but hopefully with increased investment for the state sector, and more innovative procurement and budgeting for the private sector.

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Take a look at some of our case studies to read about the experiences of schools that have partnered with us, and check out our bucketload of 5-star reviews on Feefo!

For an initial no-obligation chat about whether leasing is right for your school, please get in touch with our friendly team today.

Tags

• Leasing school equipment
• Private schools