Rather than try and answer an impossible question "just how widespread..." (this kind of question implies "give me a percentage," which is unknowable), I'll try and focus more on the social and sexual aspects that complicated homosexual relationships in boarding schools.

First of all, you're right, homosexuality was punishable by law. Though there are other examples from naval law, the most famous example is the Criminal Law Amendment Bill of 1885, sec. 11, which punished homosexual behavior with two years' "hard labour, hard fare, and hard bed." This was precisely the punishment Oscar Wilde receive in his own trial. Lawyers of the time also wryly called this law "the blackmailer's charter," observing that many were unfairly blackmailed with charges of homosexuality and consequently ruined by reputation or otherwise under sec. 11.

However, and especially where Britain is concerned, class matters. Within the semi-sacred social spheres of the boarding schools, there was a place where the homosocial relationships also included many homosexual behaviors as well.

For one, consider that boys in these places were going through puberty/adolescence with little access to girls/women. The sexual experimentation common to anyone going through that would naturally have to take place within friendships and other relationships strictly between boys.

As Havelock Ellis noted in his study of homosexuality in 1897, "Sexual Inversion," sexual play is mentioned within several testimonials, i.e. "As I never went to boarding school, I was spared, perhaps, many of the degrading initiations administered by knowing boys at such institutions." "At the age of 12, he went to boarding school and was constantly falling in love with good-looking boys." "At a private boarding school, masturbation was fairly frequent and I suppose I was initiated about 12 or 13."

Additionally, there were pederastic relationships between teachers and students. John Addington Symonds (1840-1893), a noted Renaissance scholar and literary critic, not only had relationships with other boys during his education, but also admitted to his homosexual feelings to John Conington, a Latin teacher at Oxford who approved of homosexual relationships between men and boys. He gave Symonds a copy of Ionica, a collection of homoerotic verse penned by William Johnson Cory, a renowned teacher at Eton, who had resigned in disgrace in 1872 when scandals concerning his relationships with students began to emerge.

All this to say that the pervasiveness of homosexual relationships/sex at English boarding schools was something of a culture, one that existed by the very homosocial nature of this place, as well as a small, but prevalent intellectual movement that recognized homoerotic/pederasty within Classical literature and history.

In short, in answer to "why was it so tolerated at a time when male homosexuality generally was not," it's complicated. There was not a single, totalitarian punishment of homosexuality, but depending on who you were, where you were, and what you were, there were homosocial and sexual elements of culture that were well established.

To add another perspective, consider this--just because one may not be "gay" doesn't mean that one may not engage in gay behavior, given the right time/place/people. In this respect, not much has changed, just as the ostensibly straight frat boys of today may engage in homosexual play/acts/hazing (AHEM, Jon Hamm. )

EDIT TO ADD While it's implied in my response, the answer to the second part of your question "why did admin turn a blind eye," is because 1. pederasty/other homosexual relationships were practiced by members of the faculty/admin; 2. it was punished, but only when someone told their daddy, and daddy pitched a fit. This was precisely what happened in the case of William Johnson Cory--documentation (letters between a student and Cory) was procured to the parents of the student, who then brought it to the attention of the administration. Cory was dismissed on these premises, despite being a brilliant/well-loved teacher, because these kinds of institutions were loathe to bear the stench of scandal. It did nothing to uproot the larger homosexual/pederastic practices between students/teachers, but such isolated dismissals did enough to please the offended party.