The taxation of private schools in the UK could create problematic consequences

The landscape of private education in Britain

Private education is facing near-unprecedented changes to the tax system that could create wide-reaching financial and logistical challenges. Recent data shows that across England and Wales, private educational institutions make up nearly 2,800 properties, serving roughly 7% of the student population. These establishments, ranging from preparatory schools to secondary institutions and specialised free schools, collectively represent over £555 million in rateable value.

In the 2025 and 2026 fiscal years, two major UK governmental policy changes, announced on 29 July 2024 and at the Autumn Budget, will take effect, greatly impacting this unique sector. Today, we analyse what the upcoming changes could mean for the sector with Altus Group's Jon Cheeseman, Vice President, in UK Property Tax.

As of 2025, private education will no longer enjoy the value-add tax (VAT)-exempt status it has previously benefited from. It is now subject to the standard 20% VAT rate across the board, notably including tuition and potential boarding fees. From April 2025, the long-standing tradition of charitable status benefits is coming to an end for many institutions.

The financial implications are substantial: government projections indicate these changes will generate £70 million in additional revenue during the first year, increasing to £85 million annually after that. This represents one of the most significant financial restructurings in the private education sector's recent history, potentially reshaping the landscape of independent education in England.

The property valuation question

For many private schools, historically, the on-paper value of their business rates assessment did not seem as relevant, given the substantial 80% reduction granted by that charitable status. Now, the full impact of their rateable value will come into play, significantly escalating the impact that the 2023 revaluation will have on their bottom line beyond its “on paper” rise. The last revaluation in 2023 already pushed up rateable values overall by nearly 11%, vastly outpacing the general non-domestic property sector's average 7.2% increase.

Property valuation in England and Wales involves complex valuation methods. Rateable values can be determined based on either the market-based rental basis for calculations or the typically more favourable "contractor's method" when rental data is sparse or non-applicable to the property. For schools facing the brunt of these upcoming legislative changes, assessing whether they can fairly switch from the rental basis to the contractor’s method is a powerful tool to offset some of these coming financial burdens.

The switch in valuation method primarily hinges on proving that the property has no discernible rental market value evidence. Factors such as long leaseholds, dated or non-repurposable buildings (often from the turn of the century), and others will play a crucial role in whether or not this switch can be made. 

On the other hand, the contractor's method essentially values the rebuild cost of the property, paying attention to things such as contract prices, obsolescence, age, fees, and other elements.

As noted above, until now, it has not mattered much which valuation was used for those recipients of charitable relief, and many schools have remained on the rental basis at higher rates, with the mandatory 80% relief offsetting that burden. However, a switch (where justifiable) could provide vital breathing room to smaller institutions to help them ride out the impact of these legislative changes and significantly reduce their valuations to fairer and more reasonable amounts. Especially as there is some scope to remove dedicated areas servicing children with special needs from the overall valuation footprint under the contractor method if that sole use case can be proven, further reducing the rateable value.

What this means for private schools

Research-backed by freedom of information requests suggests that more than half of the private schools currently hold charitable status. Historically, this has offered them an 80% mandatory reduction in their business rates liabilities. With that benefit removed, which is currently scheduled for an April 2025 rollout, they could face an average annual loss of £87,000 per affected school. It will only remain for institutions primarily servicing children with Education Health Care (EHC) plans in place. 

On top of that massive increase to potential business rates payments, a critical subset of roughly 300 schools with rateable values of £500,000 or more will not only lose their charitable relief but also face elevated business rate multipliers through a supplement of up to 10p starting in 2026. This change stems from a broader governmental initiative to rebalance taxation between physical and digital businesses, with higher-value properties effectively subsidising tax relief for smaller high-street establishments. 

Due to devolved powers, the implementation of these changes will vary across the British landscape. While England leads with comprehensive legislation, Wales is set to follow suit with similar proposals affecting its 83 private schools, though only a fifth currently receive charitable relief. Scotland has already implemented comparable changes, having removed its charitable rate benefits in 2022, although there are only 90 registered public schools today. 

Some exceptions exist in the new framework, particularly for schools primarily serving students with special educational needs. These institutions will retain their charitable status benefits, reflecting governmental recognition of their unique role in the education system. 

However, the effects on the independent and private education sector will be substantial — and may not be in the best interests of promoting access to quality private education for the public or relieving the burdens on the existing public education systems. This may be a case of legislative changes that sound good in theory, but a quite different story unravels once enacted. 

Cognitive dissonance at play

As Jon Cheeseman explains, “What they're thinking is that they're aligning [private schools] in terms of taxation. The problem with that is what's just been described. The potential untold consequences. If you take many pupils out of the private school sector and have to put them back into the public-school sector because of cost, ultimately, it's going to shift that cost to the public purse.” 

 A notable issue is the public perception of what “private education” means in this context. It’s natural to jump straight to prominent high-brow institutions like Eton College, Gordonstoun and even Shrewsbury School, where Charles Darwin was educated. This makes it easy to dismiss these changes as a way to make these institutions “pay their fair share”. 

 However, the reality of private education lies not in a handful of ultra-prestigious private institutions but in smaller preparatory schools and other “middle-class” institutions, which provide a vital stepping stone to parents looking to open up their children’s educational futures in smaller, focused classrooms. And unlike the affluent top end of the private education sector, these private schools won’t be able to easily absorb massive increases to their tax liabilities. 

 Said Cheeseman, “The lion's share of pupils that go to private schools in England have parents that are middle-income earners scrimping and saving to afford it, and they're sending their children to the reasonably priced small-sized preparatory schools. Here, that extra 20% in VAT fees may be a major determinant of whether they can continue to send them to these schools.”

Conclusion

While the intention is to raise additional revenue, these changes could prove significantly disruptive in the educational landscape across England, disproportionately affecting middle-income earners and their children’s education. Implementing so many legislative changes at once could, perhaps, have significant unintended consequences. It is now imperative that professional advice is sought as to how best navigate this new landscape and what options are open to minimise business rates liabilities through a thorough review of the reasonableness or otherwise of the rateable value set and the appropriateness of the method of valuation.

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