Is 2025 the toughest year for school budgeting in over a decade?

2025 has been one of the most financially challenging years for independent schools in recent memory.  

The introduction of VAT on school fees from January has been the key driver but has been accompanied by a loss of business rates relief for charitable schools in England and Wales (although at time of writing this had been rejected by the House of Lords) and an increase in employer’s National Insurance costs and National Minimum Wage (NMW) from April 2025.  

Many schools have tried to soften the blow on parents by discounting fees for the 2024/25 academic year, resulting in effective VAT rates of 10-15% across the sector. In most cases, schools limited these discounts to amounts that could be funded from reserves or other cost savings. Schools unable to offer these discounts have typically passed on a smaller benefit—around 3–4%—based on VAT recovered on costs.

Schools are now preparing, setting and communicating their 2025/26 fees, factoring in increased costs and unprecedented levels of uncertainty over pupil numbers. 

Independent schools are entering unprecedented times financially, unable to rely on previous trends for their expected pupil roll for the coming year. There is a lot of movement between independent schools as well as between the independent and state sectors. A number of well-publicised closures have played a part in this, but many other parents are looking closely at their choice of school for the next academic year.    

Budgeting strategies for UK independent schools

Given the level of financial uncertainty facing schools, effective budgeting has never been more important.

Schools that have not already done so should consider moving from incremental to zero-based budgeting. Incremental budgeting uses last year’s budget as a starting point and adjusts for known changes. It remains a popular model as it is far less time-consuming to produce and is easier to review. However, it can foster incremental rather than creative thinking and does not actively encourage staff to seek out efficiencies.  

In contrast, zero-based budgeting is more time-consuming, but allows you to start with a clean slate each year and really challenges budget holders to think about their costs and where they can gain efficiencies.   

Now more than ever, simply trying to do what you did last year will not work. Schools need to be bold in preparing their budgets to bring about real cost savings.  

A strong school budget should also support scenario planning for a number of variables, most importantly in response to changes in pupil numbers. A good model will flex based on enrolment figures, adjusting income and variable costs to demonstrate the impact on both profit and cash flow. This will allow school management teams and boards of governors to easily see the impact of the gain or loss of every pupil and discuss various scenarios when approving the budget.  

School budgets are typically prepared and approved during the spring term, as they drive key communications such as pupil fees and staff pay awards. However, given the current uncertainty, it would be sensible to revisit the budget later in the year once there is more clarity over the pupil numbers for September.   

What are your school’s financial KPIs? 

Schools have long used profit as a percentage of net fee income as a metric to measure their financial performance, with 10% being a widely accepted target return to continue to invest and remain financially sustainable. In the current climate, it is worth re-examining whether that target still fits your school’s financial strategy. 

Cash is king for school budgeting

This year more than ever, cash flow forecasting is a key part of the school’s budgeting process. Understanding your expected cash flows, including any key uncertainties and pinch points, is critical to a successful budgeting and planning process.  

Sensitivity to cashflows needs to be carefully managed—for example, the impact on the school’s cash balance if parents pay later than expected or if there is an increase in bad debts.  

Accurate cash flow forecasting allows you to make decisions on the timing of non-essential expenditure, invest surplus cash (for example from fees paid in advance), and monitor debt repayments while ensuring compliance with banking covenants. 

Capital projects – managing cash flows

Schools that have undertaken large capital projects in recent years will be able to benefit from a financial windfall in the form of a Capital Goods Scheme repayment. They should include the expected value and timing of these repayments in their budgets and cash flow planning. Decisions as to whether to designate some or all of these funds to specific future projects can be made alongside a review of the school’s reserves policy.  

Capital projects often represent the largest annual cash spend. The annual budgeting process will include a review of necessary capital expenditures—such as health and safety upgrades and essential equipment replacements—alongside more discretionary projects that enhance facilities or the educational offering. Given the uncertainty over pupil numbers and therefore income and surplus cash, schools may want to consider delaying non-essential projects in 2025/26. This of course needs to be balanced with the need to maintain the school’s asset base to attract and retain paying parents.

Schools should also be aware that certain capital expenditure will now fall under the Capital Goods Scheme for VAT, potentially impacting cashflow timing on the project and requiring more detailed record-keeping.  

Time to revisit your staffing model?  

Most schools will have a staffing model (both academic and operational) based on recent pupil numbers, but many will be facing a decline in enrolment for 2025/26. As part of your budgeting process, you should consider if your current model is still fit for purpose for your expected pupil numbers.

Is your staffing model agile enough to flex to changes in pupil numbers between now and September?  

Bad debts/increase in requests for bursaries 

As more parents struggle to afford school fees with the addition of VAT, an uptick in bursary applications across the sector seems likely but difficult for schools to quantify. Schools will need to set a budget for expected bursaries based on affordability and the need to attract pupils at certain age groups within the school that may not be full. Schools will also need to consider how much allowance to make in the budget for hardship applications from existing families. Once again, past performance and trends may not be overly reliable given the change to the financial landscape for many parents.  

Link to your reserves policy

Given the change in the overall financial landscape, it is a good time to revisit your current level of reserves and your reserves policy to ensure it is still fit for purpose and fits with your updated plans.   

A robust reserves position sends a clear message to parents and other stakeholders that you are well-led, well-managed and well-run. In times of sector-wide uncertainty, that reassurance can make a big difference to parents who may be feeling unsettled. 

For more information or to discuss how we can support your school’s budgeting process this year, please get in touch with Kerry Gallagher, Nick Sladden or your usual RSM contact.