fbpx

Autumn Statement Impact Assessment

The biggest set of tax increases in modern history.

On 30 October 2024, the UK’s first female chancellor made history with the biggest set of tax increases in living memory. Rachel Reeves’ Budget means that the tax burden in relation to GDP is now the highest on record, surpassing even post-war levels in 1948.1

After months of speculation surrounding a proposed ‘tax on wealth’, Labour’s first budget in well over decade has brought about sweeping changes to the UK tax landscape.

Arguably the most significant impact will be felt by;

  • Income Taxpayers
  • Private Schoolparents
  • Employers and Business Owners
  • Private Equity Professionals
  • Capital Gains Taxpayers
  • Estates on which Inheritance Tax (IHT) is due (soon to include Pensions)
  • Non-Domiciled Individuals
  • Farmers
  • Purchasers of Additional Property

In the following sections, we outline the order of changes, now and in the coming few tax years.

1 Office for Budget Responsibility data from 1970 to 2024, estimates that the changes announced in 2024’s Autumn Statement will seize an additional £40bn in tax revenues, which is higher than any previous amount on record.

Watch our webinar, on demand

Access recording

Immediate consequences

Income Tax thresholds frozen

Although there were no changes to the headline Income Tax rates and thresholds, the thresholds remain frozen until April 2028. This stealth tax enables wage inflation to drag a higher proportion of UK taxpayers into paying increased amounts of income tax.

The OBR has forecast that 7.8 million UK taxpayers are likely to be dragged into higher tax bands during the freeze; 4.2 million will start paying Income Tax, with 3 million more pushed into paying the Higher Rate, and an extra 600,000 forced to pay the Additional Rate by 2027-28.

Employees generally pay Income Tax at 20% on income between the Personal Allowance Threshold and the Higher Rate Threshold; at 40% on income between the Higher Rate Threshold and the Additional Rate Threshold; and at 45% on income above the Additional Rate Threshold.

Employees continue to see their Personal Allowance tapered at a rate of £1 for every £2 of income between £100,000 and £125,140, resulting in an effective 60% rate of income tax on this portion of their income.

Employees generally pay National Insurance Contributions (NICs) at 8% on income between the Primary Threshold and Upper Earnings Limit, and at 2% on income above the Upper Earnings Limit.

  • Personal Allowance frozen at £12,570 per year
  • Higher Rate Threshold frozen at £50,270 per year
  • Additional Rate Threshold frozen at £125,140 per year
  • NIC Primary Threshold frozen at £242 per week
  • NIC Lower Earnings Limit frozen at £123 per week
  • NIC Upper Earnings Limit frozen at £967 per week
  • NIC Lower Profits Limit frozen at £12,570 per year
  • NIC Upper Profits Limit frozen at £50,270 per year

The last government introduced a plan to assess the threshold at which Child Benefit gets clawed back to be based on household income, rather than at the individual level. Labour are scrapping this plan.

Different rates and thresholds of Income Tax apply to Scottish residents.

Capital Gains Tax (CGT) rates increased

Effective immediately, from 30 October 2024, the rates of Capital Gains Tax (CGT) on shares and various other assets, are increased as follows;

  • CGT Lower Rate increases from 10% to 18% (a rise of almost double)
  • CGT Higher/Additional Rate increases from 20% to 24% (a rise of one fifth)

The CGT rates for residential property gains, which do not qualify for the private residence exemption, remain at 18% and 24% respectively.

A small, annual Capital Gains Tax (CGT) Allowance remains at £3,000.

Inheritance Tax (IHT) thresholds frozen

Despite the headline Inheritance Tax (IHT) rates and thresholds remaining unchanged, they have been frozen until 2030; an extension to the freeze of two further years. This stealth tax enables inflation to drag a higher proportion of Estates into paying IHT duties.

The majority of your assets will be subject to IHT if, when you die, the value of those assets exceeds the standard nil-rate band which currently stands at £325,000. If your spouse dies before you without fully using their nil-rate band, any unused percentage can be carried forward to use when you die, subject to a claim being made by your executors within two years of your death.

With the family home often making up a large percentage of an estate, the government has introduced an additional nil-rate band on top of the £325,000, known as the ‘residence nil-rate band’. The current residence nil-rate band is up to £175,000.

This means that if you give away a home that you have lived in as your main home to your children (including adopted, foster or stepchildren) or grandchildren, they won’t have to pay IHT on the first £500,000 (£325,000 nil rate band + £175,000 residence nil-rate band).

If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1 million of your assets, including your property, are free from IHT.

Gifting allowances remain unchanged.

IHT Relief on AIM shares is reduced to 50%, giving an effective IHT rate of 20%.

Crucially, Pensions will be brought inside of Estates for IHT purposes from April 2027.

Meanwhile, Agricultural Property Relief and Business Property Relief will be reformed.

Finally, a person’s assets worldwide will be considered for IHT purposes in some circumstances, including for instance where they have lived in the UK for 10 of the last 20 years.

Private School Fees attract VAT at 20%

From January 2025, VAT will apply on Private School Fees at 20%. Schools will also be subject to business rates, where they had previously been exempt.

Many independent schools have already confirmed that they will pass some or all of the increased cost on to parents and fee payers.

While the cost of tuition fees can vary widely depending on the school and location, sending your child to a private school as a day pupil currently costs, on average, £23,925 per year, rising to £42,459 for pupils who board.2 The application of VAT could bring the average day fee to £28,710, and the average boarding fee to £50,951, overnight.

2 ISC Census and Annual Report, January 2024

Stamp Duty Land Tax (SDLT) additional dwelling surcharge increased

Effective the day after the Autumn Statement, from 31 October 2024, the Stamp Duty Land Tax (SDLT) Higher Rate for Additional Dwellings is increased by two thirds, from 3% to 5%.

This Higher Rate is applicable when you buy a residential property (or a part of one) for £40,000 or more, if it will not be the only residential property worth £40,000 or more that you own (or part own) anywhere in the world.

You may have to pay the Higher Rate even if you intend to live in the property you’re buying, and regardless of whether or not you already own a residential property. This is because the rules do not apply only to you (the buyer), but also to anyone you’re married to or buying with.

Investors’ Relief lifetime limit reduced

Effective immediately, the lifetime limit for Investors’ Relief is reduced, from £10 million to £1 million.

This will apply to qualifying disposals made on or after 30 October 2024, as well as to certain disposals made before 30 October 2024.

Non-domiciled individuals

With immediate effect, non-domiciled individuals are unable to move money into Offshore Trusts.

Obtain your bespoke financial plan.

Speak With An Adviser

Further ramifications from April 2025

Employer National Insurance Contributions (NICs) increased

From April 2025, the rate of Employer National Insurance Contributions (NICs) will rise from 13.8% to 15%.

The threshold at which Employer NICs is due, will also be lowered, from £9,100 to £5,000 per year.

Together, these measures will result in additional costs to employers of at least £615 per year, per employee – and in many cases, significantly more.

Prior to the measures introduced in the Autumn Statement, earnings adjusted for inflation were due for a modest increase of 0.2pc in 2026 and 0.3pc in 2027. Now they are set to fall by -0.2 and -0.1pc respectively. The OBR has stated that it estimates approximately 76% of the additional Employer National Insurance cost will be passed on to employees.3

More than 700,000 UK workers ‘inside IR35’ will wear the whole uplift, owing both Employer and Employee NICs.

However, more than 865,000 small businesses will benefit from changes to the Employment Allowance, which increases from £5,000 to £10,500. Employment Allowance lets businesses, charities and sports clubs reduce their annual National Insurance (NI) liability, if their employers’ Class 1 NI liability fell below £100,000 in the previous tax year.

Furthermore, businesses can still offer salary sacrifice schemes to their employees, which may have the effect of reducing Employer NIC liabilities. And, as a business owner, you could utilise a Small Self-Administered (Pension) Scheme (SSAS) to build your own tax-efficient investment pot towards retirement.

3 Office for Budget Responsibility, October 2024

Business Rates Relief reduced

From April 2025, those qualifying for Business Rates Relief will see their discount fall, from 75% to 40%. It is estimated that this discount ‘replacement’ will see qualifying businesses’ rates bills rise by 140% as a result.

Business Asset Disposal Relief (BADR) increased

From April 2025, the rate of Business Asset Disposal Relief (BADR) increases from 10% to 14%.

It is due to increase again from April 2026, to 18%.

BADR is available on disposals of business assets. It had reduced the rate of Capital Gains Tax (CGT) on qualifying gains to 10%, but now the relief/reduction is less.

Capital Gains Tax (CGT) on Carried Interest increased

From April 2025, the rate of Capital Gains Tax (CGT) on Carried Interest will increase, from 18% for basic rate taxpayers and 28% for higher/additional rate taxpayers, into a single unified rate of 32%.

Further reforms to the way that Carried Interest is taxed, are mooted from April 2026.

Carried Interest (or ‘carry’ for short) is one of the main forms of compensation in the private equity industry, and continue to attract a lower rate of tax than traditional income.

Non-Domicile Tax Regime abolished

The Non-Domicile Tax Regime will be abolished from April 2025.

It is set to be replaced by a residence-based scheme, described during the Autumn Statement as “internationally competitive.” Tax relief will apply to Foreign Income and Gains (FIG), and a Temporary Repatriation Facility will be introduced.

State Pension increased

From April 2025, the State Pension will rise by 4.1%, meaning a gain of up to £470 per year for those in receipt of the Full New State Pension.

Future impact from April 2026

Inheritance Tax (IHT) relief on business and agricultural assets significantly reduced

From April 2026, a £1 million allowance will be introduced for Inheritance Tax (IHT) relief on business assets and agricultural assets.

A new effective 20% rate of IHT will apply on the value of relevant assets above £1 million.

Business Asset Disposal Relief increases further

From April 2026, once again the rate of Business Asset Disposal Relief is increased, from 14% to 18% (vs 10% currently).

Capital Gains Tax (CGT) on Carried Interest reformed

Whilst details are yet to be given, it is mooted that Capital Gains Tax (CGT) on Carried Interest will be reformed altogether from April 2026.

Air Passenger Duty (APD) increased

From April 2026, the Standard Rate of Air Passenger Duty (APD) will rise by 13% for long haul flights, reaching up to £253.

APD is chargeable per passenger, on flights departing the UK. The Standard Rate applies to most premium economy, business class and first class fares.

Meanwhile, the Higher Rate of APD, applicable to each passenger travelling by private jet, will increase by 50%, reaching up to £1,141. Generally used as capital assets by corporations, jets allow businesses to increase productivity, and this extortionate increase in APD may have the effect of harming growth, and ultimately tax receipts. It is estimated that 70% of private aviation passengers are “middle managers going about their working day,” according to Steve Varsano, who runs The Jet Business aircraft brokerage on Park Lane.

Eventual changes from April 2027

Inherited Pensions brought inside of Estate for Inheritance Tax (IHT) purposes

From April 2027, any inherited Pension will be considered as part of an Estate for Inheritance Tax (IHT) purposes, meaning that for the first time, IHT will be due at up to 40%, subject to existing IHT rates and allowances.

Agricultural and Business Property Reliefs reformed

From April 2027, Agricultural Property Relief, and Business Property Relief, are each set to be reformed, though little more has been announced.

Air Passenger Duty increases further

From April 2027, Air Passenger Duty (APD) will rise once again, according to forecast Retail Price Index (RPI) at that time.

The effect will be felt most severely by those travelling privately, and in premium economy, business class and first class.

Speak with an expert Adviser today.

Book Your First Call

What remains largely unchanged for now?

Income Tax thresholds and rates

Employees continue to pay Income Tax at 20% on income between the Personal Allowance Threshold and the Higher Rate Threshold; at 40% on income between the Higher Rate Threshold and the Additional Rate Threshold; and at 45% on income above the Additional Rate Threshold.

Employees continue to see their Personal Allowance tapered at a rate of £1 for every £2 of income between £100,000 and £125,140, resulting in an effective 60% rate of income tax on this portion of their income.

  • Personal Allowance frozen at £12,570 per year
  • Higher Rate Threshold frozen at £50,270 per year
  • Additional Rate Threshold frozen at £125,140 per year

The last government introduced a plan to assess the threshold at which Child Benefit gets clawed back to be based on household income, rather than at the individual level. Labour are scrapping this plan.

Different rates and thresholds of Income Tax apply to Scottish residents.

Income Tax Relief on Pension Contributions

Income Tax Relief continues to be made available on Pension Contributions made personally, up to 100% of earnings or £3,600, whichever is higher.

They are further limited by an Annual Allowance, usually £60,000 which includes not only personal contributions, but also employer contributions, and any tax relief received by the scheme. Exceeding the Annual Allowance may result in a tax charge.

Pension tax relief will be granted at one’s marginal rate of tax.

Employee National Insurance (NI) Contributions

Employees continue to pay National Insurance Contributions (NICs) at 8% on income between the Primary Threshold and Upper Earnings Limit, and at 2% on income above the Upper Earnings Limit.

  • NIC Primary Threshold frozen at £242 per week
  • NIC Lower Earnings Limit frozen at £123 per week
  • NIC Upper Earnings Limit frozen at £967 per week
  • NIC Lower Profits Limit frozen at £12,570 per year
  • NIC Upper Profits Limit frozen at £50,270 per year
Capital Gains Tax (CGT) rate on residential and buy-to-let property assets

The rate of Capital Gains Tax (CGT) chargeable on gains from residential and buy-to-let property assets remains unchanged, at 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers.

Inheritance Tax (IHT) rates and allowances

The majority of your assets will be subject to IHT if, when you die, the value of those assets exceeds the standard nil-rate band which remains at £325,000. If your spouse dies before you without fully using their nil-rate band, any unused percentage can be carried forward to use when you die, subject to a claim being made by your executors within two years of your death.

With the family home often making up a large percentage of an estate, the government has introduced an additional nil-rate band on top of the £325,000, known as the ‘residence nil-rate band’. The current residence nil-rate band remains up to £175,000.

This means that if you give away a home that you have lived in as your main home to your children (including adopted, foster or stepchildren) or grandchildren, they won’t have to pay IHT on the first £500,000 (£325,000 nil rate band + £175,000 residence nil-rate band).

If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1 million of your assets, including your property, are free from IHT.

Gifting allowances also remain unchanged.

IHT Relief on AIM shares is reduced to 50%, giving an effective IHT rate of 20%.

Crucially, Pensions will be brought inside of Estates for IHT purposes from April 2027. Meanwhile, Agricultural Property Relief and Business Property Relief will be reformed.

In a further blow, the government will increase the interest rate HMRC can charge on unpaid tax, from 7.5% to 9%. Families have six months to pay inheritance tax after the death of a loved one before interest is added to the bill; but grants of probate currently take nine weeks on average to obtain, and in complex cases, the process can drag on for over a year.4

4 Probate Registry, October 2024

Stamp Duty Land Tax (SDLT) on primary residences

The current rates and thresholds for Stamp Duty Land Tax (SDLT) remain unchanged for the purchase of a primary residence.

From 31 March 2025, the temporary increase to thresholds will end, and SDLT will be due on primary residences from £125,000 (currently £250,000), with the nil-rate threshold for First Time Buyer’s Relief also due to fall, from £425,000 to £300,000.

Corporation Tax

The headline rate of Corporation Tax remains at 25%.

Current expensing reliefs are maintained.

Individual Savings Account (ISA) Allowances

Individual Savings Account (ISA) Allowances are now frozen until 2030; an extension of two years that will face significant fiscal drag as a result of inflation.

By the end of the decade, the annual deposit cap of £20,000 will have remained unchanged for a total of 13 years. The issue is exacerbated by the hike in Capital Gains Tax rates.

The total ISA Allowance remains at £20,000.

The total Junior ISA Allowance (for under 18s) remains at £9,000.

The Lifetime ISA Allowance (for saving towards a first home or retirement) remains at £4,000, with a 25% government bonus provided on contributions. The home value limit of £450,000 appears to be unchanged.

Pension Annual Allowance

The standard Pension Annual Allowance remains at £60,000, although it may be reduced to as low as £10,000 if one has flexibly accessed income via their pension, or if they have high earnings and are subject to the tapered annual allowance.

Pension Carry Forward

The ability to Carry Forward unused Pension Annual Allowances from the previous three tax years, remains.

This means a theoretical maximum contribution of £200,000 may be made in the current tax year, subject to relevant earnings. For now, this is expected to rise to £220,000 in the 2025/26 tax year, and to £240,000 in the 2026/27 tax year, based on historical Annual Allowances.

Personal Savings Allowance (PSA)

The Personal Savings Allowance (PSA) is the maximum amount of cash savings on which interest is not taxed, and remains unchanged as follows;

  • For Additional Rate Income Taxpayers, the PSA is zero
  • For Higher Rate Income Taxpayers, the PSA is £500
  • For Basic Rate Income Taxpayers, the PSA is £1,000
Capital Gains Tax (CGT) Allowances

Each UK adult continues to benefit from a Capital Gains Tax (CGT) Allowance of £3,000 per year.

Interspousal mechanisms remain.

Dividend Tax Rates and Allowances
  • Dividend Ordinary Rate remains at 8.75%
  • Dividend Upper Rate remains at 33.75%
  • Dividend Additional Rate remains at 39.35%

Each UK adult continues to benefit from a Dividend Tax Allowance of £500 per year.

Pension Access Allowances

Replacing the now abolished Lifetime Allowance (LTA) are;

  • Lump Sum Allowance (LSA) of 25% of the value of your pensions up to a maximum of £268,275
  • Lump Sum Death Benefit Allowance (LSDBA) of £1,073,100
  • Overseas Transfer Allowance (OTA) equivalent to the LSDBA

The Lump Sum Allowance (LSA) limits the tax-free lump sums you can take from pensions. Any amount you take over your allowance will be taxed at your marginal rate of income tax.

The Lump Sum and Death Benefit Allowance (LSDBA) limits the tax-free lump sums you can take from pensions, as well as tax-free lump sums that can be paid to beneficiaries after your death.

The Overseas Transfer Allowance (OTA) limits the amount you can transfer to a qualifying recognised overseas pension scheme (QROPS) without tax charges applying.

These allowances, first introduced in April 2024, remain unchanged, despite speculation that the LSA in particular might have been reduced to £100,000. If you recently made a request to draw a lump sum from your pension, as a result of this speculation, then you may wish to consider whether this decision is still in your best interests.

Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

We encourage you to contact us, to ensure you are fully utilising all available allowances this year, and that you are adequately protected from risk, as far as possible, including any risk resulting from these changes.

Embark on your financial journey.

Obtain Your Bespoke Plan

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

Please note that Cash ISAs are not available through St. James’s Place and although anyone can contribute to an ISA for a child only the parent/legal guardian can open the ISA for them.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Contact Us

Legacy Planning Redefined: Navigating the new Inheritance Tax landscape for Pensions

Pensions set to be brought inside of Estates for Inheritance Tax (IHT) purposes from April 2027

One of the most surprising announcements in Labour’s first Budget, was the Chancellor’s decision to subject pensions to Inheritance Tax (IHT). This policy reverses George Osborne’s 2015 decision to exclude pension pots from an individual’s Estate for IHT purposes. Although this change won’t take effect until 2027, it has already faced criticism as a “cruel blow” for grieving families.

This guide will outline the key changes and actions you can consider.

What’s changing?

Currently, private pensions are not counted as part of an Estate, and are free from Inheritance Tax. If you inherit a private pension from someone who died aged 75 or older, you’ll pay income tax on it; however, if they died younger than 75, it’s tax-free, unless taken as a lump sum after two years.

From April 2027, pensions will be counted as part of the Estate. This shift might deter individuals from saving into their pensions.

When Osborne initially allowed pensions to be passed on tax-free, it was part of broader reforms, including scrapping the 55% charge on certain inherited pensions. Along with Jeremy Hunt’s abolition of the pension Lifetime Allowance (LTA), pensions became an attractive legacy planning tool. Now, however, the Government says it is “removing the opportunity for individuals to use pensions as a vehicle for Inheritance Tax planning.”

The Government has opened a consultation on implementing this change, as experts warn of complex administration challenges.

Families may need to rethink their Estate planning under this new policy.

It’s worth noting that pensions left to a spouse or civil partner remain inheritance tax-free. The inheritance tax spousal exemption allows married couples and civil partners to transfer their estate to one another tax-free upon death. In contrast, benefits passed to an unmarried partner may be subject to inheritance tax. Surviving unmarried partners could face reduced income and, as a result, a lower standard of living in retirement.

Explore your options, with a no-obligation financial planning consultation.

Book A Demo

Double taxation

Families may now face an effective 67% rate of tax on inherited pension funds following the rule changes; with a ‘double hit’ from the combined effects of Inheritance Tax and Income Tax.

The removal of the Inheritance Tax exemption effectively imposes a double tax on death benefits that don’t qualify for an Income Tax exemption, particularly for those who pass away after age 75. When the entire pension fund is subject to 40% Inheritance Tax, and beneficiaries are then taxed at their marginal rate of Income Tax on the remaining amount, this can lead to a combined tax rate of up to 67% on the pension’s death benefits.

Even basic-rate taxpayers could face a 45% marginal rate of Income Tax, depending on how they choose to withdraw the funds. Beneficiaries may choose between receiving a lump sum or ongoing income, which affects their tax rate. For example, a lump sum might push them into a higher tax bracket. These changes could leave families with less than a third of the original pension pot.

Key planning actions

Drawing the tax-free Lump Sum Allowance

Despite pre-Budget speculation, the Lump Sum Allowance (LSA) remains consistent, at one quarter of the previous LTA, or £268,275.

Withdrawing the LSA and using it during one’s lifetime, to fund spending, or make gifts to family members, could offer an efficient way to reduce the value a pension subject to Inheritance Tax.

Usual gifting rules apply; for instance, surviving seven years from making the gift.

Gifting

One could gift part of their pension pot to avoid the added levy. Regular income gifts may also help you avoid the seven-year rule: for example, taking £50,000 from drawdown each year, but only spending £30,000, allows you to gift £10,000 annually to a child’s pension or a grandchild’s ISA if done regularly and without diminishing your lifestyle.

Relocating into tax wrappers

Some savers may choose to withdraw from their pensions and pay income tax, to reallocate the funds into tax-efficient vehicles like ISAs. The decision comes down to a trade-off: either keep funds in your pension, or withdraw and pay tax to invest them in a more tax-efficient structure. Obviously each person’s circumstances will differ.

Still have questions?

Following the biggest set of tax increases in modern history, it’s an opportune moment to evaluate your family’s financial situation and objectives.

We encourage you to contact us, to ensure you are fully utilising all available allowances this year, and that you are adequately protected from risk, as far as possible, including any risk resulting from these changes.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Contact Us

Paying For Private School Fees: Start Planning Early And Optimise For Tax Efficiency

Introduction

More children than ever before are attending private schools for a higher quality education, smaller class sizes, more abundant resources, and specialised academic and vocational programmes. The number of pupils attending private school has steadily increased over the past decade, with a record 556,551 pupils now attending 1,411 Independent School Council (ISC) member schools across the UK, the highest level since records began in 1974.1

However, giving your children the best possible education comes at a cost, and the expense was already a barrier for many families – before Labour won 2024’s general election. Now, the new government intends to introduce VAT on school fees at 20%, as early as January 2025.

While the cost of tuition fees can vary widely depending on the school and location, sending your child to a private school as a day pupil currently costs, on average, £23,925 per year, rising to £42,459 for pupils who board.2 However, fees at some private schools can be considerably higher. Unless schools absorb some of the increasing costs, the changes about to be enacted by Labour could bring the average day fee to £28,710, and the average boarding fee to £50,951, overnight.

1, 2 ISC Census and Annual Report, January 2024

At a glance

  • Parents could face around £460,000 in day pupil fees or £815,000 in boarding fees for each child.
  • ISAs and Investment Bonds can be used as tax wrappers to save towards school fees, potentially making tax-efficient or tax-deferred returns on your investment.
  • Unit Trusts and General Investment Accounts (GIAs) may also provide access to investing in various asset classes, with tax treatment dependent on individual circumstances.

Average boarding school fees to hit £50,000 per year

Taking a tax-efficient approach to saving towards private school fees…

Let’s assume that school fees increase by 3.5% a year. This would be the lowest increase seen over the course of a 14-year education, particularly in comparison to an 8% uplift from 2023 to 2024. Based on the average costs, parents could face around £460,000 in day pupil fees or £815,000 in boarding fees for each child.

However, while these figures are considerable, the sooner you start saving towards your child’s school fees, the better.

By starting early, saving regularly, and investing, parents could build up a substantial sum over time to help cover the costs of private education.

Taking a tax-efficient approach to school fees can help make private education much more accessible.

Key tax-efficient solutions

Individual Savings Accounts (ISAs)

An ISA is a tax-efficient investment vehicle that enables parents to put aside a certain amount each year, without incurring any income or capital gains tax (CGT) on the interest or investment returns earned on the savings.

If both parents make monthly contributions that fully utilise their ISA allowance (£20,000 per person in the 2024/25 tax year) from the child’s birth, this could accumulate to a sum of £585,000 by the time the child is 11 years old, based on 5% net annual growth after fees, compounding monthly.* Withdrawals from an ISA are tax efficient, so parents can extract funds as needed to pay for school fees without incurring any capital gains or income tax liability, or invest in other options, such as stocks and shares.

*These figures are examples only and they are not guaranteed – they are not minimum or maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment.

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than you invested.

The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

On- and Offshore Investment Bonds

An Investment Bond is a tax-efficient investment wrapper that allows parents to save and invest to pay for private school fees. An Investment Bond invests in a range of assets, such as stocks, shares, bonds, and funds. You can invest a lump sum or make regular contributions.

During the term of the investment, returns earned within the bond are not subject to income or capital gains tax (CGT), providing significant tax savings over the long term with the option to draw down up to 5% of your original investment per year on a tax-deferred basis. As the 5% allowance is cumulative, any unused allowance is carried forward for up to 20 years.**

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

**Please note that if the withdrawals taken exceed the growth of the bond, the capital will be eroded.

Unit Trusts and General Investment Accounts (GIAs)

Unit Trusts and General Investments Accounts (GIAs) pool capital from multiple investors into a single fund, which is then invested across various asset classes, such as stocks, bonds, and property. Investors benefit from an annual dividend allowance of £500 in the 2024/25 tax year, and an annual capital gains allowance of £3,000 in the 2024/25 tax year.

Howver, Unit Trusts and GIAs are subject to income tax on any dividends or interests earned, which can reduce the overall tax efficiency of the investment. The tax treatment of these investments can also vary depending on personal circumstances, such as income level and tax bracket.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Gifting Allowance

Under current UK tax law, individuals can give up to £3,000 per year to another person using their annual gifting exemption, including a child or grandchild attending a private school. If you are married or in a civil partnership, you can combine this with your partner’s allowance, resulting in a total annual gifting exemption of up to £6,000 per year.

This offers a tax-efficient way to pay for private school fees. However, financial gifts above £3,000 can be subject to inheritance tax (IHT) if the donor dies within seven years of making the gift. The current nil-rate band for inheritance tax is £325,000 per person.

If a parent has adequate disposable income, this may be utlisied to pay for education costs (including private school fees) under ‘Dispositions for the maintenance of the transferor’s children’ rules.*** A disposition is not a transfer of value for IHT purposes if it is made by one party to a marriage or civil partnership and is both:

– in favour of a child of either party and
– for that child’s maintenance, education or training for a period not ending later than the year ending 5 April in which the child attains the age of 18, or
– after attaining 18, ceases to undergo full-time education

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

***Further criteria applies within the HMRC IHT Manual IHTM04175 which is subject to change.

Scholarships and Bursaries

Many private schools offer means-tested bursaries to help with the cost of tuition. A third of pupils in private education receive means-tested bursaries,3 which can cover up to 100% of fees.

Bursaries are awarded based on financial need, and can be a valuable way for families who may not otherwise be able to afford private school, to access high-quality education for their children. The amount of the bursary awarded is based on a means test, which considers a family’s income, assets, and other relevant factors.

Scholarships are typically awarded based on merit, such as academic or athletic achievement, musical talent, or artistic ability. Scholarships may not cover the full cost of tuition. The proportion of fees covered will depend on the school and the type of scholarship offered.

3 ISC School Fee Assistance, April 2023

Paying in advance

Paying private school fees in advance can be a way to save money on the overall cost of tuition. Many private schools offer discounts to parents who pay tuition fees in advance, with the size of the discount increasing with the size of the advance payment.

However, parents considering paying fees in advance should carefully weigh the potential gains against the risks associated with tying up a significant amount of capital in pre-payment.

Depending on the investment chosen, there may be potential for higher returns than the discount offered for advance payment, but there is also a risk of capital loss.

Navigating a myriad of options

Private school education can provide children with a vital head-start and opportunities that help them to achieve their goals. However, it’s undoubtedly an expensive commitment, and navigating the options for paying private school fees can be complex and daunting.

Many options are available, including tax-efficient investments, bursaries and scholarships, pre-payment of tuition fees, and a range of capital drawdown routes. It’s important to carefully consider your options and obtain expert advice when planning and funding private school fees.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Contact Us
Close Search

Email To Myself

Close

By submitting your details you give consent for Apollo Private Wealth to reach out for marketing purposes. You may unsubscribe at any time.

Apollo Private Wealth together with St. James's Place Wealth Management plc are the data controllers of any personal data you provide to us. For further information on our uses of your personal data, please see our Privacy Policy or the St. James's Place Privacy Policy.