Labour’s VAT policy will force 35,000 children out of private schools, costing the Treasury £300m, the Office for Budget Responsibility (OBR) has revealed.
A further 2,000 children will leave private schools, consisting of international pupils who do not move into the UK state system or domestic pupils who move into homeschooling, according to the Government’s policy paper on applying VAT to private school fees.
The OBR has also revealed that the majority of VAT will be passed onto parents, with the Government saying fees are expected to rise by an average of 10 per cent.
The Government has admitted that the policy will cause “disruption” to children with special educational needs and disabilities (SEND), as well as pupils forced to leave private schools midway through the school year or during exam courses.
A total of 37,000 pupils leaving the sector equates to 6 per cent of the private school population. This is within the range of three to 6 per cent of pupil movement predicted by the Institute for Fiscal Studies (IFS) in its 2023 report on the policy.
However, the Independent Schools Council (ISC) has voiced concerns that the OBR and the IFS have “underestimated the number of children who will leave the sector”.
“Tens of thousands of families are going to see their children’s education disrupted, the organisation told i.
Maxwell Marlow, director of research at Adam Smith Institute, a free market think tank, said the risk of bringing in the policy is “too high”.
“No one knows exactly what will happen when this tax is levied on school fees,” he told i. “But this policy could put more pressure on state schools, reduce opportunities for underprivileged children, and not raise a penny for the Government in the meantime.”
The OBR’s economic and fiscal outlook, released on 30 October, has also revealed that the majority of private school VAT imposition will be passed on to parents.
This is because the OBR has estimated that around two-thirds of the effective VAT rate of 15.4 per cent will be “passed on through higher fees” while a quarter will be reflected in “reduced service provision”. The effective VAT rate applied to around 600,000 private school pupils in the UK is lower than the standard rate of 20 per cent because schools can recover some input costs.
The remainder of approximately 1.3 per cent will be absorbed by schools through cost efficiencies and from profits.
The OBR document states: “Overall, we estimate that around two-thirds of the cost is passed on through higher fees, just less than a quarter is reflected in reduced service provision, and the remainder is absorbed through cost efficiencies and from profits.”
Education consultant Neil Roskilly, former chief executive of the Independent Schools Association (ISA), said parents have “every right to look at published financial statements and ask why reserves aren’t being used for what is clearly a very rainy day”.
He told i that the OBR’s impact analysis leaves “little doubt that the sector will look somewhat different after January”.
He said: “Many schools were caught on the hop when implementation was brought forward from September 2025, and with just nine weeks to go, many schools are still to give parents a firm figure for their fees.
“Some don’t have billing systems in place to charge the additional tax, even though this may be a requirement earlier than January. Oversubscribed and popular schools are likely to impose close to the full VAT rate of 20 per cent, while those with places and the ability to offset the new tax will still be looking at fee increases of around 14 per cent.
“Schools that have invested in capital expenditure in areas such as sports pitches and boarding houses over the last 10 years will be able to claim back VAT and therefore offset fee increases even further. But few have the deep financial reserves to help stagger increases.”
The policy is expected to make the Treasury more money each year in the OBR forecast, starting at just £460m in 2025-25 and increasing to £1.7bn in 2029-30.
It states that the cost of educating an additional 35,000 state sector pupils will cost £300 million, based on a £7,690 per pupil cost in England.
The Government admitted that it may cause “disruption” for children forced to move schools, especially if the move occurs midway through the school year or during GCSE or A-level courses.
Its policy paper states: “Parents and carers may choose to increase working hours to cover fee increases, with impacts on work-life balance, or there may be disruption caused by children moving to new schools. Disruption will be greater if these moves occur within school years or key educational stages (for example, during GCSEs or A-levels).
“However, this disruption will only affect a small proportion of pupils and families.”
The Government has also admitted that the VAT policy will have “disruptive impacts” on children with special needs and disabilities (SEND) who are forced to move schools.
“In cases where pupils with SEND move schools as a result of this measure, there will be disruptive impacts, while their local authority puts in place measures to meet their needs,” HM Treasury states in its policy paper.
It continues: “Parents or guardians of SEND pupils may experience a more significant administrative burden if they choose to move the child to a different school or apply for an EHCP (or both).
“However, the government estimates that only a very small minority of private school pupils (6 per cent) will move and that most school moves will occur at natural transition points, which will reduce overall disruption.
“Longer-term impacts on this group may be lessened by revenue raised by this measure being used to help the 94 per cent of children who attend state schools, including over one million children with SEND.”
The Government also announced that the core schools budget will increase by £2.3bn next year to “support” its pledge to hire thousands more teachers for key subjects.
Chancellor Rachel Reeves also announced a £1 billion uplift in funding to reform the SEND system, which will come from the overall £2.3bn school funding uplift.
She pledged to “improve outcomes for our most vulnerable children and to ensure that the system is financially sustainable”.