Private school VAT hike leaves MOD facing bigger education bill

From January 2025, independent school education and boarding fees became subject to VAT at the standard rate of 20%. For most parents, that meant higher bills. But in the case of military families using the Continuity of Education Allowance, part of that increase falls back on government.

CEA is the MOD scheme that helps eligible Service families keep their children in stable education despite postings, mobility and deployments. It is not simply a private education perk. It exists because Armed Forces life can make ordinary school continuity difficult, particularly when parents are posted around the UK or overseas.

That creates an unusual public finance problem. When the Government taxes private school fees, it raises revenue from fee-paying families. But where the state itself is helping to pay those fees through CEA, the tax rise also increases the amount the state may need to spend.

The scale of the issue is already clear. In the 2023/24 academic year, the MOD paid £88.6 million in CEA to support 4,005 children from 2,666 Service personnel households. That was before VAT was added to private school fees.

Following the Budget announcement, the MOD carried out an in-year review of CEA rates. Updated rates were brought in from December 2024, ahead of the VAT change taking effect in January.

The rise was significant. The maximum senior boarding allowance increased from £9,080 to £10,211 per term, while the junior boarding allowance rose from £7,489 to £8,730 per term. That represents a major uplift in the amount the MOD is prepared to pay per eligible child.

If increases of that scale are applied across a large share of the previous £88.6 million annual CEA bill, the MOD’s yearly cost could move towards, and potentially beyond, the £100 million mark. The final figure will depend on the mix of pupils, school fees, claimant numbers and future rate reviews, but the direction of travel is clear: a tax designed to raise money has also increased spending pressure inside Defence.

That matters because the MOD is already operating under heavy financial demands. Defence budgets are under pressure from equipment programmes, personnel costs, housing, recruitment and retention challenges, and wider commitments to increase national defence capability. Any additional education allowance bill has to be managed within that wider spending environment.

The issue also raises a broader question about joined-up government. The Treasury may gain revenue from VAT on school fees, but other parts of the state can face higher costs where they are responsible for supporting pupils in independent settings. For the MOD, the cost comes through CEA. In other areas, government has also had to consider the impact on publicly funded placements for children with special educational needs.

For Service families, the increase in CEA rates is a protective measure. For taxpayers, however, it shows that the fiscal impact of the VAT policy is not simply a case of money flowing one way into the Exchequer.

The Government has argued that ending the VAT exemption on private school fees will raise revenue to support education and young people. But the CEA example shows the policy also creates knock-on costs when public bodies are themselves exposed to private school fee inflation.

CEA rates are reviewed annually, and future costs will depend partly on how independent schools respond to VAT, whether fees continue to rise, and whether claimant numbers change. The MOD and Armed Forces family organisations are also expected to keep monitoring the impact on retention, family stability and school continuity.

For now, one thing is clear: the VAT hike may bring in money for the Treasury, but it has also left the MOD with a bigger bill.