Private School VAT: A Complex Picture

Like it or not, VAT is now applicable on private education.

Our guess is that most readers will not like it, but do you have a properly informed objection, or does your argument amount to “I don’t like it”, and “it’s not fair”? How can you navigate conversations about the issue in a way that is reasonable and perhaps changes some minds? And are you open to the idea that your opposition is perhaps not so reasonable after all?

In this post we explore this highly emotive and complex issue in the same spirit as we do all of our “conversation starters”: with an open and curious mind. Does the imposition of VAT on private education make fiscal sense and help the majority of children in state schools, or is it an ideological, populist move, based on a flaky economic case?

And if you’re looking for some real opinion, you can find it at the bottom of the post “For what it’s worth…”

Maybe this post will soften your objection, or perhaps strengthen your arguments. Share your thoughts below. Did we miss any angles, for or against? Did your mind change, either way? Let us know.

How we got here

The Historical Context and Left-Wing Opposition

The Labour Party, and the broader “political left”, have a long-standing ideological opposition to private education, viewing it as a driver of social inequality and entrenched privilege.

This modern opposition was significantly galvanized in 1956 with the publication of Anthony Crosland’s “The Future of Socialism”, which sparked a "surge of pressure" spanning from 1956 to 1978 (3).

During this era, the Labour Party frequently considered either banning or heavily taxing private schools. Several major government commissions (including the Fleming Report (1944), the Newsom Report (1968), and the Donnison Report (1970)) were established during the post-war period to examine how to integrate or reform public schools, though they resulted in little structural change. (4)(3)

The sector enjoyed a period of "relative comfort" and government friendliness under Conservative rule from 1979 to 1997, best encapsulated by the creation of the Assisted Places Scheme, which used state funds to subsidise private school places for some lower-income pupils. (4)

However, pressure mounted once again following the Charities Act 2006. This legislation removed the automatic presumption that education was a “charitable purpose”, forcing independent schools to explicitly demonstrate their "public benefit" to the Charity Commission to maintain their tax-exempt status. (4)

This culminated in a bitter high-profile legal tribunal in 2011 between the Independent Schools Council (ISC) and the Charity Commission over how much fee assistance schools were required to provide by way of bursaries. (4)

Manifestos and the Path to VAT

When Value Added Tax (VAT) was first introduced in the UK in 1973, private school fees were granted an exemption, echoing their historical exemption from the old Purchase Tax.

The intellectual groundwork for removing this specific exemption was laid in a 2011 article in the Fabian Review (a left-leaning think tank journal) by Sunder Katwala, which proposed a 20% VAT on fees, arguing that the market could comfortably sustain the price hike. (2)

Since then, the policy of removing the VAT exemption has officially appeared in three consecutive Labour Party manifestos:

2017 Manifesto: Labour pledged to remove the VAT exemption on private school fees, intending to use the revenue to fund free school meals for all primary children.
2019 Manifesto: The party reiterated the commitment, promising to "close the tax loopholes enjoyed by elite private schools" to improve the lives of all children.
2024 Manifesto: The policy became a central, costed pledge. The government estimated it would raise over £1.5 billion by 2028/29 to fund 6,500 new state school teachers, 3,000 new nurseries, and breakfast clubs in all primary schools.

The Economic Case

The government's economic justification for the tax relies heavily on the concept of "price elasticity of demand"—the idea that private school enrollment is relatively insensitive to price increases.

Research by the Institute for Fiscal Studies (IFS) noted that the share of pupils in private schools (around 6% to 7%) has barely changed over the past two decades, despite fees rising by 20% since 2010, and 55% since 2003. (1)

Because the vast majority of private school children come from the wealthiest households (with 40% coming from the top income decile alone), economic models assumed that families would absorb the extra cost rather than pull their children out of the sector. (1)(5)

Relying on this data, the Office for Budget Responsibility (OBR) utilised an elasticity figure of 0.5. They also calculated that, because schools can reclaim VAT on their capital expenditures and input costs, the effective VAT rate passed on to parents would be around 15.4%. (6)

Ultimately, the OBR projected that only around 6% of pupils (35,000 to 37,000) would leave the sector. Even after accounting for the estimated £270 million annual cost of absorbing these displaced pupils into the state sector, the Treasury concluded the policy would comfortably yield a net gain of £1.5 billion to £1.7 billion per year by 2029-30. (6)

Motivated reasoning and flawed assumptions?

The critical (some would argue cynical and self-serving) view on this historical context is that “the left” have always hated private education and have always been determined to destroy it, and that this economic case is built on flawed assumptions and motivated reasoning. It is nothing more than populist “politics of envy”.

Let’s see if there’s anything to that claim by exploring an assumption that is foundational to the £1.5 Billion economic case.

“Price elasticity”

The model used to reach the £1.5 Billion estimate assumes that private school fees are “highly elastic”. Specifically, a price elasticity of 0.5 is assumed, which means that for every 1% increase in pricing, only 0.5% of the population will baulk at the new price and drop out of the market.

This assumption is based on historical fee increases, and argues that fees have increased substantially (55%) since 2013, yet the proportion of pupils in private education has held steady during this period, indicating that the increase has been comfortably absorbed.

This assumption is foundational for two reasons:

They assume that the taxable base will hold steady, meaning that the total revenue on which the VAT is applied will not shrink to the point that the economic case is undermined.
They assume that the additional cost of an influx of children into the state sector will not offset the revenue generated from the VAT. The assumed marginal increase in pupils to state schools is assumed to be relatively negligible and capable of being absorbed without additional capital expenditure (new schools, classrooms, facilities, etc).

The economic model is highly sensitive to this assumption. The £1.5 Billion benefit case is undermined from both directions if the model overestimates the price elasticity:

If more kids drop out of private education (either by choice or because their school closes) then assumed, then the taxable base shrinks and VAT revenue will be lower than expected,
AND the costs on the state will be much higher than anticipated; significantly so if additional capital expenditures are required to accommodate the influx of pupils.

Critics argue that 0.5 is indeed a vast overestimate of the elasticity for several reasons.

Gradual vs sudden increase

Although the total nominal growth in fees over the last decade has been substantial, it actually backwards engineers to an annual inflation in school fees of around 4% (4). Although this beats core inflation, it is not nearly as headline-worthy as the total growth in fees over this period.

A gradual increase puts pressure on many families, but through budgeting and salary and asset inflation over this period, it can be absorbed by many.

Critics argue that it’s mathematically unsound to apply price elasticity from a period of gradual increases to assume the impact from a much more substantial “step-change” increase in one year.

Underlying supply/demand shifts

Critics of the elasticity assumption also point out that it ignores one side of the supply/demand curve. Over the period analysed, the assumption argues that demand has held in the face of increased pricing, but ignores the fact that supply also increased in that period.

The Adam Smith Institute (ASI) explicitly attacks the Institute for Fiscal Studies (IFS) and the government for relying on historical elasticity, arguing exactly this point. (7)

The ASI argues that while fees rose 20% in real terms (removing the effect of underlying economic inflation), the overall population of school-age children in the UK also grew by 10%. Therefore, the fact that private school numbers didn't fall isn't because parents are price-insensitive; it's because a massive demographic boom artificially propped up demand.

Demographic shifts

The 10% sector growth has been substantially driven by new openings of lower-cost private schools (as acknowledged in a 2025 high court judgement (8) and Baines Cutler report (9)).

These smaller, often specialist or religious schools, have changed the demographic profile of families in the private sector over this period. Both the new schools and the new parents attracted to these schools are much more price sensitive and vulnerable to price increases.

These are the schools and parents, the report argues, that will be hit hardest by the increase, with many more of the schools closing and parents exiting the market than the historical analysis would suggest.

Other economic conditions and trends

The other reason that critics argue against the assumed elasticity is that it comes at a time when the underlying cost of living is high and the labour market is relatively stagnant, which reduces the financial overhead available to families to absorb the increase.

Does the data bear these arguments out?

When implementing the 20% VAT policy, the government and the OBR predicted a long-term total displacement of around 35,000 to 37,000 pupils (approximately 6% of the sector). Because the policy was introduced mid-academic year, the government explicitly forecast that only 3,000 pupils would leave in the first year (2024/25). (12)

Data emerging in 2025/26 has created a fierce debate over whether this assumption was accurate, with critics and government bodies interpreting the same data very differently:

The Critics' View: An Underestimated Immediate Drop-off.

Critics argue that the government's elasticity assumption severely underestimated immediate price sensitivity.

The official ISC 2025 Census revealed that the government's short-term estimate of 3,000 displacements was completely dwarfed by reality. In just the first year, the census recorded a like-for-like drop of 13,363 pupils—a 2.4% decrease across the sector. The sharpest falls were recorded at the main school intake years (Reception, Year 3, and Year 7), which all saw enrolment plummet by more than 5%. (11)

At the same time, school closures have been far higher than anticipated. The government's impact assessment estimated that the policy might cause a "modest" temporary increase in school closures, predicting around 100 extra closures spread over the next three years (10). In reality, by January 2026, 105 private schools had already ceased operations since the policy was introduced. (13)

The OBR and Institute for Government's View: The Model is Working.

Despite the 13,000 drop-off appearing to contradict the 3,000 short-term estimate, both the OBR and the Institute for Government (IfG) argue that the underlying data actually validates the 0.5 elasticity assumption.

The IfG notes that the VAT shock was always more likely to deter parents from starting their children in private education, rather than forcing them to pull their children out mid-stream. Therefore, the OBR stated in November 2025 that the specific 5% decline at key entry points found in the ISC census provides "initial support" for their long-term assumption of a 6% overall decrease. (14)

The IfG also argues that focusing purely on the loss of 13,000 pupils ignores a massive demographic shift: the school-age population is naturally declining across the UK. To see the true behavioural impact of the VAT, one must look at the share of pupils in private education. The IfG calculates that the private school share of pupils only fell by 0.1 percentage points over the last year to 6.4%. This is a highly modest drop by historical standards (ranking fourth out of the last nine yearly changes) and means the proportion of children in private schools has not even hit an all-time low. (15)

Because the OBR believes the elasticity models and pupil displacement figures are tracking as expected, they have completely dismissed claims of a revenue collapse. In the official Economic and Fiscal Outlook (November 2025), the OBR confirmed they have not changed their estimate of 35,000 displaced pupils. Furthermore, rather than reducing revenue estimates, the OBR actually revised the projected yield from the VAT measure up slightly by an average of £40 million per year, driven by updated forecasts for average earnings. (16)

What are we to make of this?

What are we to make of this early data and the view that the economic argument is flawed? Whilst the data do seem to support the claim that more pupils are leaving private education and more schools are closing than anticipated, the Government and OBR insist that their model remains sound.

But is this all moot? The total public sector spending on education in the UK is budgeted at £146 billion for the 2025-26 financial year (17), so even if we believe the £1.5 Billion claim, this represents less than a 1% budget increase. This is unlikely to create a material improvement in state schooling.

Perhaps the economic argument is irrelevant and it’s driven by other motivations. But why would “an attack on private education” be such a popular policy move?

Fairness

For many people, private education is seen as fundamentally unfair; perpetuating generational privilege with a child’s prospects being a function of the luck of their birth above all else.

The counter argument to this view is that “being wealthy” brings all sorts of benefits, and that this isn’t fundamentally unfair—it’s capitalism.

Wealthier people get to drive nicer cars, live in bigger houses and wear finer clothes. Their children also enjoy lots of direct benefits: higher quality diets, better healthcare, lower financial anxiety in the home. These benefits incentivise wealth generation, which is the foundation of the capitalist system.

This is the basis of the “politics of envy” argument: that the opposition on the basis of “fairness” amounts to sour grapes from those that haven’t done well enough in the capitalist environment to offer their children similar benefits.

However you feel about this argument, there’s no doubt that “fairness” is the primary angle in the public debate. You only need to read comments threads on related Facebook posts to see this for yourself.

Targeting “elites”

A similar argument is that this move only affects “elites”, for whom it’s impossible to find any sympathy.

The counter-argument is that this is based on an outdated caricature of the private school family. Many that support this view are anchored to the image of Harrow and Eton pupils in their straw boaters (which itself sounds like an unfair caricature), but the reality is very different.

The vast majority of schools are actually very small, with 53% of UK Independent Schools having fewer than 150 pupils (4) and 50% being non-selective (18).

Almost half of all UK independent schools have opened since 1990, and a third have opened since 2010 (4). The majority of these new schools are small, and often cater for specific faiths or educational philosophies, with government documents explicitly acknowledging that these types of schools have lower fees and "generally catered for middle income families who were more price sensitive" (19).

Again, we need only look at Facebook to see the prevalence of this view in the public debate. You will see sentiments such as “my heart bleeds for these snobby families at private schools!” being countered by “my children go to private school, and I don’t feel particularly snobby. We make a lot of sacrifices and work hard to budget for it.”.

It’s also worth noting that the 2019 Labour manifesto explicitly used the phrase “elite private schools”...

Progressive (or regressive)?

This all amounts to the argument that this policy is progressive and redistributes wealth and opportunity for a more equitable society.

But the data suggests that it might be having the opposite effect. Although lots of people are being priced out of private education (or forced out because their schools are closing) the pressure is being felt at the bottom of the economic scale within the private school sector.

Although private education remains inaccessible to most, the growth in lower-cost schools since the nineties has, to a limited extent, democratised access. Whilst the likes of Harrow and Eton remain the reserve of the “ultra-high-net-worth”, the fastest growing sector has come from schools that are accessible for dual-income families.

And these are the schools and families that feel the pain most acutely and are more likely to exit the sector. Although the ultra-high-net-worth families may dislike the additional cost, it is less noticeable in the bigger picture.

At the same time, larger and more established schools have a higher “capital expenditure” as a proportion of their total cost base, and schools can reclaim VAT on their capital expenditures which helps offset the VAT on fee receipts. This has the effect of acting as a significant discount on capital projects, such as building a new swimming pool or renovating their boarding houses.

For smaller schools with more modest facilities, capital expenditure is relatively low, with the cost base being mostly made up of teacher salaries and other operational expenses on which VAT cannot be reclaimed.

So it may be that this causes real pain and forces out the lower tier of families and schools, but is met with a resounding “shrug” by the very “elite” schools and families that this move is thought to target.

The long-term effect of which may be to make the private school landscape look a lot more like the “strawman” stereotype that many think of as the representative private school family.

For what it’s worth

I know from bitter experience that forecasting is hard. You reach a point where you need to assume something to plug into your model, so you use a number that has some scientific justification and move forward.

I also know how easy it is to engage in “motivated reasoning” when trying to build a business case. You pick numbers for your assumptions that sit within the bounds of reason, but there are such large margins of uncertainty that it’s tempting to pick the numbers from within that range that best suit your agenda.

So whether this policy makes £1.5 Billion, £0 or minus £1 Billion, we probably won’t know for several years. If forced to get off the fence, my guess, given the early data and my direct experience, is that £1.5 Billion is an overestimate.

But I think this misses the point. This is a “wealth tax”, and a very clumsy and potentially ineffectual one at that.

I have no moral issue with the existence of private education. At the same time, I want state education to be the best it can be, ideally to the point that there’s no need for a private system at all (see also healthcare).

Someone has to pay for that, and that can only fall to those that are able to pay for it (notwithstanding legitimate conversations about government waste, misallocation of resources, etc - which are all valid points but not for this post).

My view is that we have a government that is desperate to show that it is extracting a greater pound of flesh from the wealthiest in society, but is either unwilling or too afraid of upsetting special interest groups to do anything too radical.

An actual wealth tax on net assets is too administratively complex.
An Alternative Minimum Tax (AMT) upsets the business lobby.
Harmonising income and capital gains tax upsets wealthy donors.
Likewise a Land Value Tax.

VAT on private schools is perfect:

It has the “anti-elite” narrative (great for appeasing backbenchers and their electoral base).
It doesn’t penalise the ultra-wealthy enough to really upset them.
It doesn’t touch business.
The private school lobby is not influential enough to worry about.

A useful thought experiment is to ask yourself “if private education never had a VAT exemption, how easy would it be to argue that it should have one?”. If I put emotion aside, I’m really not sure it would be an easy case to make.

However, given that it is the status quo and the entire market has built itself around that norm, the sudden imposition of VAT is reckless and has significant collateral damage for many “non-elite” (middle-class dual-income) families.

I personally know lots of families that are being forced to move their children mid-year, and this is a huge disruption for those kids. These are good people who work hard and make sacrifices to send their kids to these schools.

At the same time, we’re all seeing the flurry of school closures. These are entire communities being displaced, hundreds of jobs being destroyed, and are most often the smallest and most affordable schools.

The historical price-elasticity does show some tolerance to price increase so, even if the government was determined to impose VAT, why not phase it in? This would have at least given schools and families time to adapt.

So even if you do hold the view that it was a loophole that needed to be closed, perhaps you’d concede that the way it was done was reckless and unnecessarily destructive?

And if you feel any sense of glee at that destruction on the basis that it targets “snobs”, then I’d encourage you to look at the data and think again. It’s actually created a minor inconvenience for the ultra-wealthy and hurt an awful lot of normal middle class families. For most it’s not that (in the words of Monty Burns) the increase means that these families can buy “one less ivory backscratcher”, it’s a significant source of disruption and stress.

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