Strategies parents are using to pay for private school

More than half a million families will be hit with a huge bill before school term starts in September. The first term’s fees for private school are due, and they can be eye-watering. If your children or grandchildren are among them, it’s worth considering the best ways to cover the cost.

Often parents will try to pay out of their income, which can be a real stretch. In some cases, they will end up borrowing at least some of the money by remortgaging or taking a personal loan. Some will pay monthly using schemes established by the schools or a lender the school is working with.

If your children reach school age and you haven’t set aside money to cover the cost of fees, you may feel you have no other option. But borrowing compounds the cost of private school. There are a few other options – especially if you start early.

Prepare as soon as you can

It’s not going to help if school is imminent, but if you have younger children, the earlier you can start putting money aside, the better. If you have 5-10 years or more before you need the money, you can consider investing in a Stocks and shares ISA to give it the best possible opportunity to grow. However, as the time approaches when you need the cash, you’ll need to derisk those investments to protect yourself from short-term market movements.

Ask if grandparents can help

If they’re able to help, not only can it make an enormous difference to your finances, but if they set up regular payments and keep good records, it can count as a regular gift from income, so it falls out of their estate immediately for inheritance tax purposes.

You don’t need to wait until the fees are due: if they put money aside from birth, they can take advantage of potential investment growth and spread the cost of their support over a longer period.

Consider a bare trust

If you’ve already used your ISA allowances, you can set up a bare trust, investing on behalf of the child. The money put in the trust counts as being given away immediately for tax purposes. Money left in the trust belongs to the child at the age of 18, but the trustees can access money before then, as long as it’s for the benefit of the child. Some people will withdraw money to pay school fees.

Income and gains are classed as belonging to the child, so in most cases they fall into tax-free allowances. The major pitfall, however, is that if a parent pays into the trust and the income is £100 or more a year, it’s taxed as belonging to the parent. It’s why it’s usually a more suitable option for gifts from grandparents, or where investments don’t produce income.

Pick the right savings account

For fees that are payable in the next 1-5 years it makes sense to derisk investments, so a savings account or Cash ISA may be a sensible home for the money. It’s a good idea to hold cash, but given you know exactly when you’ll need it, it’s an opportunity to use a fixed rate account, where you tie it up for a period in return for more interest. If you’re managing a number of fixed accounts, you can consider a cash savings hub, which lets you open accounts with a number of different banks without having to complete new application forms, and manage them all in one place.

Check if the school can help

Around a third of all students get help with fees, according to the ISC. Unfortunately, it’s not usually a significant chunk of the cost, but it helps. There are often scholarships for gifted children, discounts for siblings or the children of employees, while some have discounts if parents have specific employers, like the armed forces or the church.