Encouraging your children to save is part of being a responsible parent.
Stick those £1 coins into a jar, watch them grow, and then watch them potentially grow faster in a saving account. It can be a good way to build good financial habits.
But you might not feel quite so happy to be raising a financially astute child when you realise it’s you who are going to be paying tax on those savings.
The taxman might not be eyeing up the nation’s piggy banks, but he is keeping a close watch on children’s’ savings accounts and charging accordingly.
Children and Tax
Children (for tax purposes, a child is someone below the age of 18) are taxed just like adults. It’s a simple fact that is often forgotten because children don’t usually have an income.
What they do have is a personal income tax allowance—currently £12,570 per year. They also benefit from the Personal Savings Allowance up to £1,000 of interest tax-free and the Starting Rate for Savings, which can allow up to £5,000 of savings interest to be tax-free if the child has little or no other income.
This means a child could earn up to £18,570 in interest before paying any tax. But in practice, most children don’t come close to these thresholds. So, what’s the problem?
The £100 Rule
The problem is that the taxman is a cautious fellow, and believes some parents might use their children’s tax-free allowances to shelter their own savings.
So, if a child earns more than £100 in interest in a tax year from money given by a parent, then the parent—not the child—must pay tax on the entire interest amount. The parent is required to add the income to their own for reporting to HMRC as appropriate under the normal rules.
With interest rates higher than they were, even modest savings can generate significant and taxable returns. For example, £2,000 in a children’s savings account earning 5% interest would be enough to breach the £100 threshold.
If your child’s savings are generating interest from money you’ve gifted, and that interest exceeds £100, you’ll need to report it to HMRC. Many parents are unaware of this rule. That lack of awareness could lead to penalties if HMRC discovers undeclared interest in your children’s savings accounts.
interestingly, this rule does not apply to money given by grandparents, relatives, or friends. It only affects cash that originates from you as the child’s parent, although it does include stepchildren and adopted children. But before you are tempted to cut off your children’s pocket money, there are ways to mitigate the taxman’s attentions.
Children’s saving without the tax
You could split your contributions, so that both parents contribute to junior’s growing wealth. This will mean keeping careful note of the money you both give, but it will mean doubling the threshold for tax to £200.
But a more suitable idea might be to use a Junior ISA, rather than a conventional savings account as a rewarding home for your children’s savings. You, and grandparents, other relatives and friends can contribute up to £9,000 per tax year (2025/26).
A Junior Individual Savings Account is a tax efficient savings or investment account for children under 18. They are available to UK-resident children under 18 who don’t already have a Child Trust Fund. They are managed by a parent or guardian, but the money belongs to the child, who gets full control when they turn 18.
You can choose a Cash Junior ISA, which is a safe and predictable savings account, or a stocks and shares junior ISA which offers the potential for higher returns though stock market investment. Your child can even have one of each.
Whatever you choose, they are a tax efficient way of saving and not subject to the £100 rule.
Starting a Junior ISA
There are plenty of Junior ISA’s to choose from, and it might be a good idea to get some expert help to narrow down your choice.
At Continuum we can provide an overview of the market and find the Junior ISA, or ISAs that are appropriate for your offspring.
If you want to help ensure your generosity is directed at your children rather than the taxman, call us today.
Children’s savings and income tax – Which?
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation you should seek independent financial advice before embarking on any course of action.
Investors in ISAs do not pay any personal tax on income or gains. Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation advice and deposit accounts.
Investments do not include the same security of capital which is afforded with a savings account.
The value of investments can go down as well as up and you may not get back the full amount invested.
