Private school teachers’ pensions under threat from Labour tax raid

Sir Keir Starmer's plan to remove a VAT exemption for private schools will push them to re-examine all elements of their cost base - Anthony Devlin/Getty Images

Private school teachers have been warned their pensions could be under threat from Labour’s VAT raid.

One major teaching union has already started informing members that with schools forced to cut costs if their VAT exemption is removed, pension contributions could be on the hit list.

The Independent Schools’ Bursars Association has also warned that Labour’s policy would leave schools looking at “every level of their cost base,” including considering lowering pension contributions, dropping less popular subjects and making redundancies.

While not a legal requirement, many private schools enrol their teachers into the same generous “defined benefit” pension plan used by the state sector.

But in recent years a growing number of private schools have taken their staff out of the scheme due to spiralling costs – and Labour’s VAT raid could push even more to abandon the pensions.

Private schools have already been ditching the scheme since April 2019 when the contributions paid into the scheme by schools increased from 16.48pc to 23.68pc of salary.

By December 2022, 230 private schools in England and Wales had dropped out. A further 76 stopped new staff joining the scheme as they phased out membership, figures from teachers’ union NASUWT show.

It meant just 918 schools remained in the Teachers’ Pension Scheme (TPS), leaving fewer than half of the 1,844 private schools in England and Wales as members. Since then, 18 more have quit entirely and 76 have given notice of phased withdrawal.

The cost increased again in April this year, with employers now required to put in 28.68pc of a teacher’s salary. The Treasury will cover the rise for state schools, but private schools have to find the additional money themselves.

Experts say that combined with Labour’s plan to start charging VAT, which was announced in its manifesto and could start as early as September, it could lead to more cuts to pensions.

David Woodgate, chief executive of the Independent Schools’ Bursars Association, said the rises in employer contributions had already been “unaffordable” for many schools.

“We have around 500 schools that have already negotiated with their teachers in order to withdraw from teachers pensions or close it to new entrants, so offering a defined contribution scheme.

“Although you cannot say because VAT will be imposed schools will pull out [of the TPS], what you can say is schools will have to look at every level of their cost base, which will include pension cost, wage cost. Some schools may even have to look at redundancies. They may have to look at minority subjects which are not so popular and not so cost effective.”

The National Education Union has already said it will “challenge any schools in the independent sector using Labour’s policy to try and take teachers out of the Teachers’ Pension Scheme.”

Another teaching union said that schools cutting pension contributions or salaries in the wake of Labour’s policy could not be ruled out and it has already been advising members of the risks to their retirement savings.

The move will also affect private schools in Scotland, where the employer contribution rate for the Scottish Teachers Pension Scheme rose from 17.2pc to 23pc in September 2019. In April this year, it hit 26pc.

Scotland’s largest teaching union, the Educational Institute of Scotland, said it “does not accept any diminution of our members’ terms and conditions, in either the private or public sector, including their pensions.”

Labour’s announcement was also criticised for a lack of clarity, leaving schools having to plan with little detail.

Mr Woodgate added: “Labour has really said nothing other than they will impose VAT on schools in the independent sector and abolish the business rate relief, but we know absolutely nothing more than that even with the manifesto. We’re still effectively in the dark.

“We may not have a definition of how the VAT charge is going to work in practice for independent schools until late summer or early autumn. We’re planning, modelling what ifs, but it’s against a little bit of a blank canvas still.”

When private schools decide to withdraw from the teachers’ scheme they have to consult with members and offer an alternative pension – which is usually less financially generous. As a last resort, they can also “fire and rehire” staff on less favourable terms, which some schools have already done.

Others are offering staff less favourable pay terms in order to stay in the pension scheme, or one-off cash incentives to withdraw.

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