Levying VAT on private school fees in the Autumn Budget

PolicyEngine projects the reforms to private school VAT would raise £1.5 billion in 2025.

See the full impact on PolicyEngine here.

The Autumn Budget 2024 confirms the previously signalled intention to levy VAT on private school fees. Using PolicyEngine's open-source model, we analyse the fiscal and distributional implications of this reform.

We project the private school VAT reform will raise £1.5 to £1.6 billion per year, totalling £7.7 billion from 2025 to 2029.

Projections from HM Treasury and the OBR each total £8.6 billion, 12% higher than ours, as shown below.

The variations between our estimates and official projections may stem from different assumptions about the total value of private school fees or varying projections of future enrollment patterns.

The OBR and HM Treasury both estimate the impact of introducing VAT on private school fees but differ in key assumptions. The OBR assumes an effective VAT rate of 15.4%, factoring in cost recoveries, with two-thirds of the cost passed to parents as higher fees, nearly a quarter absorbed by reduced services, and the rest through efficiencies. They use a demand elasticity of 0.5, predicting that around 35,000 fewer pupils will attend private schools, mostly due to fewer new joiners. In contrast, HM Treasury applies the full standard rate of 20%, calculating the tax base by multiplying pupil numbers by average fees and projecting this over time based on earnings growth. Our analysis assumes no behavioural responses and focuses only on the direct cost impact of VAT, using a static calculation without adjustments over time.

This reform disproportionately affects households in the upper income deciles, reducing the net income of the top decile by 0.15% on average.

The policy would decrease net income for 3% of the population, with effects concentrated in higher income deciles.

When analysing impacts by wealth rather than income, this reform contributes to the pattern where all wealth deciles see lower net income, though with notably larger effects on wealthier households who are more likely to use private education¹.

vahid ahmadi
Research Associate at PolicyEngine

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