Ten tricks from financial experts that can reduce the cost of sending your child to private school before tuition increases

Providing a child with private education is far from cheap – and can become much more expensive. Parents can already expect to spend around £18,000 a year on day schools, or £43,000 on board and lodging.

With the election approaching, Labor has pledged to impose VAT on private school fees if it wins, immediately raising prices by 20 percent. Removing the current VAT exemption will save around £1.5 billion, according to Labor, which it plans to use to boost funding for state schools.

Understandably, this measure is causing panic among private school parents.

“Even before the prospect of VAT charges arose, rising rates have made many think twice about sending their children to private school,” said Carl Green, director of financial planning at asset manager Evelyn Partners. “But a 20 percent tax would be a dealbreaker for many more people.”

However, there are several ways parents can reduce the bill.

1. Pay costs in advance

This requires a significant lump sum – nothing less than tens of thousands of euros – but it can lead to significant savings. The discount typically ranges from two to five percent, depending on the school and how much you pay in advance.

Most independent schools are registered charities, meaning they can invest their money in low-risk investments and not have to pay tax on the returns. So they can invest the money for a greater return than you would receive after taxes. They then share that benefit with you.

2. Offshore bonds that can pay within the term

Investment bonds issued by companies outside the UK can be a tax-efficient way to pay school fees.

The advantage is that the investment can usually grow largely tax-free, increasing returns.

Parents can set one up and name themselves as trustees and their children as beneficiaries.

The bond is then split into several policies – enough to cover the cost of each term. When it pays out, the tax on the winnings is payable by your child, not you. This means that your child’s tax exemptions and tax rate – which is usually lower – are used, reducing the tax burden.

3. A lump sum from your pension

When you turn 55, you can withdraw a quarter of your pension pot as a tax-free amount in one go. This can be a tax-efficient way to pay premiums. Moreover, there is primarily a tax reduction on pension contributions.

However, because this money may become available for school fees later in life, another option is for a grandparent to donate the pension amount in a lump sum.

This adds another tax benefit because – provided they live for another seven years after the gift is made – it can also reduce a future inheritance tax bill.

4. ‘Gifts’ that avoid inheritance tax

If you, or your child’s grandparents, are concerned about inheritance taxes, paying school fees may be a good solution. Regular donations from income are exempt from inheritance tax, provided they do not affect your standard of living.

Suppose your annual income is €50,000, but you only need €40,000 to get by. The remaining €10,000 can help with school fees and thus pass on your inheritance in a tax-efficient manner.

5. Make optimal use of scholarships

According to the Independent Schools Council, more than a third of students in private schools receive some form of financial support from the school.

Scholarships are offered to lower-income families, meaning they either pay a lower fee or nothing at all. These scholarships are means-tested and the criteria varies from school to school.

6. Scholarships that are open to everyone

Unlike grants, grants are not targeted at lower-income families, so anyone can apply.

They are intended to help exceptionally talented children get the best education possible. If your child is gifted academically, or in sports, music or art, it is worth researching scholarships.

They typically reduce fees by about 10 percent, but can also be awarded in addition to a grant.

When choosing a school, you create a shortlist and find out from each school which scholarships your child may be eligible for.

7. Set up a family business that pays dividends

If your child has wealthy grandparents who want to help with education costs, they can set up a family business and name your children as shareholders. They then put income-producing assets into the business – perhaps a property or shares.

If school fees are due, the company pays a special dividend to cover the costs. The dividend would be taxed using the tax exemptions and the child’s tax rate, which will likely be lower than the grandparents’ rate.

Parents are not allowed to do this because there are rules to prevent them from trying to take advantage of their child’s tax status for their own gain.

8. Check if there are higher discounts for siblings

Many private schools offer discounts for siblings. For example, Clifton College in Bristol offers a five percent discount for the second child, 20 percent for a third and 50 percent for a fourth or more.

Discounts may also apply to children of members of the armed forces, private school teachers and members of the clergy. These discounts are rarely advertised, so be sure to ask.

9. Shop around for deals close to home

Costs can vary greatly from school to school. “It may be worth looking at day attendance rather than boarding where possible,” says Alexandra Loydon, director of partner engagement and consultancy at St James’s Place.

10. Focus on the most crucial school years

Consider combining state and private education so you can focus your money on the most important school years. You can send your child to public school for primary school and early secondary school, then pay for private education for the GCSE and A-level years.