What does it mean for a school to go into financial deficit – and how do you get out of it again?

A deficit happens when a school’s planned or actual spending exceeds its revenue – not just in-year, but after accounting for any carry-forward balances. If, at the end of the financial year, the school has a negative revenue balance, it’s considered to be in deficit.

But not all deficits are equal, and the process differs depending on the type of school:

• LA-maintained schools must seek approval from their local authority to hold a licensed deficit. This usually requires a recovery plan and monthly financial monitoring.
• Academies and multi-academy trusts (MATs) report to the Education and Skills Funding Agency (ESFA). A deficit may lead to a Notice to Improve and greater scrutiny, particularly where financial management is seen as weak.

Deficits are closely monitored, and for good reason: while schools aren’t businesses in the conventional sense, they are publicly funded organisations responsible for significant sums of money. Persistent or unmanaged deficits can erode confidence and impact the quality of education on offer.

Is the problem getting worse?

Yes – and fast.

The proportion of schools anticipating a deficit this year is much higher than those who actually reported one last year. In 2023-24, DfE figures showed about 15% of maintained schools ended the year in the red. For trusts, around 47% recorded an in-year deficit in 2022-23.

The gap between anticipation and outcome shows schools are planning cautiously – but also reflects rising uncertainty. For many, it's not a question of if a deficit will happen, but when.

What’s driving school and trust deficits?

Three main pressures are converging:

1. Flat or falling income

Per-pupil funding has increased nominally, but not enough to keep pace with inflation. The Institute for Fiscal Studies projects a 1.2% real-terms drop in school funding per pupil in 2025. And for many urban areas, pupil numbers are falling, creating additional pressure.

Meanwhile, additional needs are rising – especially around SEND – but funding for high needs remains constrained.

2. Rising costs

Staffing is by far the largest cost in any school budget. The recent 6.5% teacher pay award was only partly funded centrally, and support staff costs have also climbed. Add to that still-high energy prices, inflation on supplies and services, and the hidden costs of building maintenance (including issues like RAAC or asbestos), and it’s no surprise schools are struggling to balance their books.

3. Structural and demographic change

Falling rolls in some regions – particularly urban primaries – are leading to smaller classes, while the cost of running underused buildings remains high. Some schools face the unenviable combination of fewer pupils and rising costs.

The immediate consequence is loss of financial freedom. Any school in deficit will have to submit a recovery plan and stick to it. In practice, this often means:

1. Staffing changes – restructuring, holding vacancies, or reducing support hours
2. Curriculum cuts – fewer subject options, or less time for enrichment
3. Increased oversight – monthly financial reporting, restricted procurement, or approvals needed for new expenditure
4. Reputational risk – both locally (parents, community) and with staff

For MATs, a school running a deficit can create tension across the trust, especially if shared reserves are involved. In extreme cases, a struggling school could be re-brokered to a new sponsor.

But a deficit isn’t the end of the road – and many schools have successfully recovered.

The most successful recovery plans don’t rely on a single bold move. They’re built on marginal gains – a mindset borrowed from elite sport: small, cumulative improvements that add up to meaningful change.

Here’s what that looks like in practice.

Quick Wins (0–6 Months)

These changes are mostly operational, relatively easy to implement, and can quickly reduce outgoings:

• Re-benchmark spending: Compare your non-staff costs to similar schools. Are you overspending on cleaning, broadband, stationery?
• Energy savings: Switch to energy-efficient lighting, review heating schedules, ensure buildings shut down properly overnight and during holidays.
• Supply costs: Tighten absence management procedures and reduce reliance on costly agency staff. Consider pooling cover across a local cluster or MAT.
• Catering contracts: Reassess portion sizes, menu choices and provider contracts to eliminate waste.

Medium-Term Moves (6–18 Months)

These require more planning and usually involve staff and timetable decisions:

• ICFP (Integrated Curriculum and Financial Planning): Align your curriculum offer and staffing model more closely. Are you running “micro-classes” (very small class sizes in certain subjects) that could be consolidated?
• Shared services: Joint procurement through frameworks (LA, DfE, or MAT-level) can reduce IT, insurance, and licensing costs.
• Income generation: Letting out school facilities, hosting after-school clubs, or accessing community grants can bring in extra revenue – though this works best as a supplement, not a solution.

Strategic Shifts (18 Months+)

Bigger structural changes may be needed in schools with persistent deficits or long-term viability concerns:

• Federations or MATs: Joining a partnership may help share leadership, admin, and premises costs.
• Estate rationalisation: If parts of the site are underused, is it possible to mothball, repurpose or dispose of them?
• Revisiting PAN: If pupil numbers have declined significantly, consider adjusting the published admission number and reconfiguring staff accordingly.

Every step of the way, the key is data. Schools need accurate, up-to-date information about where money is going – and where it could be saved.

Culture matters

Getting back to financial health isn’t just technical – it’s cultural, too.

Leaders need to:

1. Build buy-in with governors and staff for recovery plans
2. Celebrate small wins to keep morale up
3. Avoid false economies – cuts that save money short term but damage pupil outcomes
4. Keep the focus on the core mission: delivering quality education

And crucially, they need space to plan, not just react. That’s why early action is vital – the sooner a potential deficit is identified, the more options a school has to recover.

Case in point

One small primary school in the North West found itself heading for a £120,000 deficit by the end of 2023. Instead of waiting, the headteacher and SBM ran a forensic audit of every line of spend.

They made a plan:

• Combined two classes to reduce supply reliance
• Switched catering providers
• Let out the school hall three evenings a week
• Delayed replacing ageing laptops in favour of reconditioning

By summer 2025, they had wiped out the deficit – without making any teaching redundancies.

Financial recovery takes time, clarity and a lot of persistence. But it is possible – and more importantly, it's necessary. As more schools feel the financial squeeze, it’s not enough to simply react. Leaders need the tools, the insight, and the confidence to act early and act smart.

Whether you’re already facing a deficit or just trying to avoid one, the time to strengthen your financial strategy is now.