Labour's reforms to VAT tax on private schools

PolicyEngine projects Labour's private school tax plan would raise £7.7 billion over five years, mainly affecting wealthier households.

• We estimate a £1.5 billion revenue increase from Labour's proposal to raise the VAT rate on private schools to 20%.
• Our analysis projects that Labour's proposal to remove tax exemptions from private schools would raise a total of £7.7 billion in tax revenue over the five-year period from FY2025 to FY2029.
• We estimate that the Gini index of income inequality would decrease slightly by 0.01% in FY2025.
• We also estimate that Labour's plan would lower net income for 3.3% of people.

Labour has proposed a policy change aimed at reducing educational inequality and raising additional revenue for the public sector. Their plan involves removing tax exemptions from private schools, including VAT exemptions and business rates relief. In this report, we provide a comprehensive analysis of Labour's proposal using household data, offering a score of the policy's potential outcomes. This approach (compared to using administrative data) allows us to examine a broader range of potential effects, including changes in the income distribution. In this report, we analyse Labour's key policy proposals by implementing them in our household model. We present our estimated impacts based on the policy reform details and ISC census data, providing a comprehensive view of the potential effects on households.

PolicyEngine's static analysis¹ of Labour's plan to remove tax exemptions from private schools estimates a budgetary impact of £1.5 billion. This aligns with the Institute for Fiscal Studies (IFS), which projects a £1.3-1.5 billion net gain to public finances per year.

The chart presents PolicyEngine's estimates of the effects of Labour's proposed VAT policy on private schools over the next five years. It shows projections for both the raised tax revenue and the percentage of people experiencing lower net income from FY2025 to FY2029.

Our analysis of Labour's proposal to remove tax exemptions from private schools reveals a mixed impact on household incomes. While the overall effect is modest, with an average decrease in net household income of 0.1% in FY2025, the impact is progressively distributed across income groups:

• Deciles 1-3: The lowest income groups experience negligible changes in their net income.
• Deciles 4-6: Middle-income households see minimal effects from the policy, with only slight changes to their net income.
• Deciles 7-8: Upper-middle income groups are slightly affected, experiencing small but noticeable reductions in their net income.
• Deciles 9-10: The highest income households bear the brunt of the policy's impact, with the most significant reductions in net income, as they are the primary users of private schools.

Our analysis of Labour's plan reveals a targeted impact on household incomes across different income groups in FY2025. The policy would decrease net income for 3% of the population, with effects predominantly concentrated in higher income deciles. The lowest income groups (deciles 1-3) see no change, while the impact begins to appear from the 4th decile upwards. The most significant effect is observed in the highest income group (decile 10), where 13% of households experience a loss of less than 5% in their net income. Overall, 97% of the population sees no change in their net income, indicating that the policy's financial impact is limited to a small segment of relatively higher-income households.

Labour's proposal to remove tax exemptions from private schools is projected to have a modest impact on income inequality from FY2025. The Gini index, a common measure of income inequality, is projected to decrease by 0.01%. This suggests a slight overall reduction in income disparity across the population. The policy also appears to have a targeted impact on high-income groups, with the income share of the top 10% decreasing by 0.01%. The income share of the top 1% is also expected to decrease slightly by the same amount.

We estimate that Labour's plan would raise £1.5 billion in revenue in FY2025, primarily affecting higher-income households, with 3.3% of the population experiencing a decrease in net income. It also would cause a modest reduction in income inequality, decreasing the Gini index by 0.01%.

vahid ahmadi
Research Associate at PolicyEngine

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