Planning for school fees

Financial advice to support your saving

When it comes to saving for private school fees, you can’t start planning soon enough.

According to the Independent Schools Council (ISC) 2017 annual census, the average term fee for private day school rose by 3.6% last year to £4,473. That’s just for one child, for one term, which means the annual average cost per child is £12,960.

Boarding school fees are more than double this, with the average term fee in 2017 standing at £10,753, up 4.1% on the previous year.

If you're looking to factor school fees into your financial planning, you should bear these points in mind.

Work out how much you’ll need

To begin with, you need to work out how much you’ll need to fund your child’s education. According to the ISC, average school fee increases currently stand at 3.6%. Though average annual fee increases are at their lowest since 1994, it's a still a good idea to budget for increases of at least 4% each year.

Start early

Consider putting money away on a regular basis as soon as possible. If you start saving straight after your child is born, you’d have around 5 years before you need to start paying school fees, or 11 if you’re thinking of starting their private education in secondary school. 5 years is also the generally accepted minimum period that investments need to grow – but the longer you can give your money, the better.

Tax-efficiency matters

Many people have traditionally saved for school fees by putting money into tax-efficient Individual Savings Accounts (ISAs).

This tax year (2018-19) you can put up to £20,000 in ISAs. The big attraction with ISAs is that all returns and interest are sheltered from income tax and Capital Gains Tax (CGT).

If you hold savings outside an ISA, the Personal Savings Allowance (PSA), which was introduced on 6 April 2016, enables basic-rate taxpayers to earn tax-free annual savings income – interest – of up to £1,000 from bank or building society savings accounts and certain other investments. Higher-rate taxpayers receive a £500 allowance. However, additional rate tax-payers don't get a PSA. The Dividend Allowance, also introduced in April 2016, means investors can now earn up to £2,000 (reduced from £5,000) of dividend income outside an ISA each year tax-free.

These changes, on the face of it, may make the benefits of ISAs seem less compelling if you're saving for school fees. However, bear in mind that savings held in ISAs don’t count towards your PSA or Dividend Allowance, so you can use these allowances for any additional savings or investments outside your ISAs. Many people also hope that their returns over time will exceed these limits.

Using an ISA to save up for school fees requires some careful thought. At all times, don’t lose sight of the fact that the value of investments can fall as well as rise, which means you may not get back the amount you invest and therefore there may not be enough to pay those school fees. Also remember that tax rules can and do change over time, and how valuable they are to you can change as your circumstances do.

Other ways to cover school fees

Most parents’ worst fear is running out of money and having to take their child out of a private school where they’re settled and thriving. Planning ahead can help reduce the risk of this happening, so it’s worth exploring different ways you can cover the cost of school fees.

Scholarships and bursaries

Contact the school you're considering sending your child to and ask about the scholarships and bursaries they offer. Many of these may be means-tested, so only those on low incomes will be eligible, but there are often financial awards available to children who are particularly gifted in a certain area, such as music, art or sport, regardless of household income.

Paying fees up-front

Many of the larger private schools offer their own school fee schemes that ask the parents to pay some or all of the fees upfront. This capital sum is then invested by the school to cover the fees of the coming years. In return, parents are offered a percentage discount on fees — typically anywhere between 3% and 5%.

Help from grandparents

Some families are lucky enough to have generous grandparents who are willing to contribute towards their grandchildren’s school fees. Before they provide any financial help, it may be worth consulting a tax adviser, who can talk through the inheritance tax (IHT) implications of gifting money for school fees.

Each person is entitled to give away up to £3,000 a year, free from IHT. Called an annual gift exemption, this covers payments made to savings accounts, all types of trusts, child trust funds and Junior ISAs. People also have the right to carry over any unused annual exemption from a previous year into the next. However, carried-over exemptions expire if they're not used from one year into the next.

Bare trusts are also often used by grandparents who want to help with school fees. Under this type of trust, grandparents are trustees and decide how their money is invested. The child is the beneficial owner and takes ownership at age 18, but until then, the trustees can withdraw money for the benefit of the child, for example, to pay for school fees.

Again, always remember that tax rules can change at any time and their impact on you will depend on your individual circumstances, which, of course, may also alter.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

Barclays is not providing you with financial, legal or tax advice, so nothing contained in this article should be construed as constituting legal, financial or tax advice. Tax rules and legislation can change and the benefits and drawbacks of a particular tax treatment will vary with individual circumstances. We recommend that you take professional advice where required. You have sole responsibility for the management of your tax, financial and legal affairs, including making any applicable filings and payments, and complying with any applicable laws and regulations.

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The value of investments can fall as well as rise. You might not get back what you invest.