Private schools could face a “double whammy” of tax hits if Rachel Reeves introduces a levy on their staff pension contributions in the Budget later this month, experts have warned.
The sector – which will already see 20 per cent VAT on school fees from January 2025 – has been warned to prepare for an increase to their teacher pension contributions.
Neil Roskilly, who ran the Independent Schools Association from 2010 to 2021 and now advises schools, said it could be possible that the Chancellor brings in a National Insurance levy on pensions in what would be “another potential blow on top of adding VAT on bills and charging local business rates”, although there is no guarantee the Chancellor will go down this route.
“Staffing can make up around 70 per cent of an independent school’s costs, so any change to pension contributions may be significant,” Mr Roskilly told i. “I’ve not come across a school that has planned for this so far, but it should be on everyone’s radar as a potential risk.”
Former pensions minister Sir Steve Webb told i that independent schools would be under “additional financial pressure” if the Chancellor decides to levy national insurance (NI) on employer pension contributions.
Tom Selby, director of public policy at investment platform AJ Bell, said an NI pensions levy would “effectively be a second tax increase” on top of the VAT policy, which is the “definition of a double whammy”.
However, Mr Selby said looking at NI pension contributions would be “one of the least worst options” available to the Chancellor on Budget day as she attempts to bolster economic growth.
It is widely expected that the October 2024 Budget will include a number of spending cuts and tax rises to plug a £22bn “black hole” in the UK’s public finances which Ms Reeves revealed shortly after Labour entered office.
One measure thought to be under consideration is to apply NI to the pension contributions made by employers on behalf of their staff, according to a paper published by consultants LCP, where Sir Steve is a partner.
For most workers, employers pay 13.8 per cent of salaries to the exchequer and employees pay 8 per cent, but pension contributions are exempt. This has resulted in salary sacrifice schemes where employees accept a lower salary in exchange for the employer putting more into their pension, saving them both on national insurance.
The Government estimates that the cost of not charging NI on the pension contributions made by employers is around £23.8bn.
LCP said a possible change could mean employers having to pay NI on contributions. It says initially this could be charged at a lower rate than contributions on wages – perhaps at around 2 per cent, which would raise around £2bn.
Historically, public sector employers – including state schools – have been refunded by the Government for extra tax costs as it would essentially mean cuts to the public purse.
But the private sector has to stump up the cash itself, potentially adding to financial pressures as a result of Labour’s VAT on independent school fees and the removal of business rates.
“The implications would be additional financial pressure on independent schools, which has already led some schools to change the pension offering to their teachers,” Sir Steve told i.
If changes to employer NI contributions are implemented, it could prompt a further exodus of private schools from the Teachers Pension Scheme (TPS), which is a generous defined benefit (DB) pension scheme which guarantees staff a fixed annual income in retirement.
The employer contribution rate for the TPS has been creeping up since 2019, rising from 16.38 per cent to 23.68 per cent. From April, the rate rose again to 28.68 per cent which was deemed “unaffordable” for most private schools, i previously reported.
More than 300 private schools have already left the TPS, with many more either implementing a phased withdrawal or being in consultation, according to figures from the Independent Schools Bursars’ Association (ISBA).
Luke Sibieta, a research fellow at the Institute for Fiscal Studies (IFS), said the move could increase the cost of each teacher by up to 4 per cent at private schools that are still part of the TPS. Schools that have already left would face lower contributions with similar rates to other businesses.
Mr Sibieta said the two key outcomes of the potential NI levy are, “one; it would increase costs for private schools, as it would for any other business across the country, and two; schools might be more likely to leave the Teacher Pension Scheme because it becomes so expensive”.
Sir Steve added: “If the new pension arrangement involved a lower rate of employer contributions than when they were in the TPS then the tax hit would be a bit smaller – but still unwelcome no doubt.”
i previously revealed that an exodus of more than 13,000 pupils from private schools is under way, which research by the sector into the impact of Labour’s tax on its fees suggests.
Independent Schools Council (ISC) survey results, seen by i, show that private school rolls fell by 1.75 per cent last month compared to September 2023 and are due to fall by a further 0.71 per cent in January – amounting to 3,950 leaving next term when the 20 per cent VAT on fees comes in.
A deputy headteacher at a leading independent school, still part of the TPS, expressed concern over “anything that potentially adds even more financial strain to independent school budgets”.
They told i: “There is a significant movement in independent schools out of the Teachers Pension Scheme and that will only accelerate if this [NI levy] becomes law.
“I think it’s short-sighted… The financial consequences to the sector and those jobs that rely on the sector could be really significant.”
Lynne Horner, independent specialist at the Association of Schools and College Leaders, said: “We are not aware of any planned changes to pension contributions.
“While we recognise increased employer contributions have put considerable financial pressure on independent schools in recent years, we would encourage all employers to offer the Teachers Pensions Scheme. All teachers and school leaders should have access to a high-quality pension scheme.”
A Treasury spokesperson said: “We do not comment on speculation around tax changes outside of fiscal events.”
The government has previously stated it wants to “ensure all children have the best chance in life to succeed” and that “ending tax breaks on private schools will help to raise the revenue needed to fund our education priorities”.
