If the mistake had not been spotted by local authority officials, the Oratory boys' school in Earls Court, west London, would have received a further pounds 500,000 more than its correct allocation this year.
John McIntosh, headmaster of the 130-year-old grant-maintained Roman Catholic school, said he spent the money unaware of the mistake. He considered not repaying the money but relen-ted after taking legal advice.
Mr McIntosh says the school will now have to undertake some 'careful housekeeping'. Plans for a junior department for specialist music and choral singing are in jeopardy.
The Oratory receives direct funding from the Government. The school opted out of local authority control in 1989. It has 1,200 pupils, mostly boys, but there are 100 girls in the sixth form.
Last year, the school was allocated a total budget of pounds 4.3m. But after complaints from the local council that the figures had been miscalculated, it was reduced to pounds 3.9m, even though the pounds 400,000 had already been spent.
A further cut is to be made in the budget for this year, bringing it down to pounds 3.7m - a total cut of pounds 900,000, or 20 per cent of the school's budget.
Staff at Hammersmith and Fulham council noticed the error when they looked closely at the Department for Education's grant calculations. The school's allocation is based on a complicated formula, taking into account everything from the number of pupils to the size of the school boiler.
Part of the problem was that department officials based a portion of the funding on the total teaching staff salary bill instead of the average salary.
The officers realised that, even if all the teachers were on the top salary band, the school should have received only pounds 41,000. But the department had given it pounds 321,000.
The council says when it raised the error, its objections fell on deaf ears. It had to threaten the Department for Education with legal action before anything was done.
Mr McIntosh said he knew nothing about the mistake until it came to light at the end of the last financial year. 'The budget appeared to be more or less what we had the previous year, uprated for inflation,' he said.
It is unlikely that all of last year's overspend will be taken back in a single year, according to education department officials. The Funding Agency for Schools, a quango which began work in April to review school funding arrangements, is considering how best the money can be repaid. 'It would be unreasonable to expect a school to take such an enormous drop in funding in one year,' said a DfE official.
He added that the local authority were not out of pocket because of the mistake. Even though the council administers grants to maintained schools, its own budget for locally managed schools was correct, he said.