Once you have the children saving, there are a range of different types of Children’s Accounts available to suit most needs.
Some of the most common types are Easy Access Accounts, Notice Accounts, Regular Savings Accounts and Fixed Rate Accounts.
In addition, you can also choose a Junior ISA, which gives many younger children a tax free account to save into.
It is also worth noting that from the age of 16, children can invest into both a Cash ISA and a Junior ISA, which is held until the age of 18.
The terms and conditions of children’s accounts vary widely, such as the age range that the account is available to and what degree of access is allowed to the money.
In addition, many accounts will offer gifts such as piggy banks and soft toys, but it’s important not to be drawn to an account simply because of the freebies.
While it’s a good way to get them interested at the beginning, how the account works and the interest rate payable is far more important in the long run.
Children have their own personal allowance, so for the majority there will be no tax to pay on their savings interest.
However, parents should be aware that there may be a tax liability to themselves on the interest earned on any money they gift to their children, until they reach age 18.
This even applies to cash put into an adult ISA (adult ISA can be opened from age 16). However if the gross interest earned is less than £100 for each parent’s gift, it will be treated as the child’s under the de minimis rules.
This means that provided the interest earned does not make the child a tax payer, they will be able to offset this against their personal tax allowance, so it will often be free of tax.
If the interest is more than £100 for each parent’s gift then it will be treated as that parent’s interest for tax purposes and therefore they may need to pay tax at their marginal rate.
Gifts from any other family members or friends will not be viewed in the same way. Instead, any interest earned will be treated as belonging to the child themselves and therefore can be earned tax-free if they are non-taxpayers.
Previously, an R85 form had to be completed by a parent or guardian to allow the interest to be credited to the account without any tax being deducted.
However, since the introduction of the Personal Savings Allowance on 6th April 2016, all interest is paid without tax taken off by banks and building societies, meaning that the R85 form is no longer needed.
So, Children’s Accounts are a great place for parents to put money aside regularly for their child’s future, particularly if you take advantage of one of a number of regular savings accounts on the market, which often provide higher returns than a standard account.
There are also plenty of options available for lump sum deposits. In addition, for older children, encouraging them to put money aside in a savings account is a great way of getting them in the savings habit, setting them up well for the future.
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Junior ISAs
As mentioned earlier, a Junior ISA is a type of tax-free savings account which is opened on behalf of a child.
Accounts can be topped up by parents, friends and family up to a limit of £4,128 in the current tax year.
Like adult ISAs, Junior ISAs are available in both cash and stocks and shares varieties.
Junior ISAs were introduced in November 2011, replacing Child Trust Funds. This meant that some children were stuck in these accounts, whilst providers focused their attention (and rates) on the newer Junior ISAs.
Luckily, the change in rules in April 2015 meant that those holding Child Trust Funds can now choose to transfer to a Junior ISA, meaning that they do not miss out on some of the higher returns available.
Junior ISAs are opened by a parent or legal guardian on behalf of a child, with the money in the account belonging to the child, although it cannot be withdrawn until they turn 18.
Parents, friends and family can all contribute to the Junior ISA, as long as the total amount stays within the limit, so it can be a great way of building up funds for the future.
The main advantage of a Junior ISA over a standard children’s savings account is that parents can contribute into this account without falling foul of the tax rules that limit the interest on gifts from parents to less than £100 per year, per parent.
To clarify, if money given to a child by a parent outside a JISA earns gross interest of more than £100 in any tax year, the parent is taxed on all the interest.
At an interest rate of around 3%, a parent would fall foul of this rule on savings of around £3,300 and as the amount saved increases over time, it could have a significant impact going forward.
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