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Best Children's Savings Use kids to earn up to 6% tax free

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Children can earn up to 6% in the top savings accounts - yet many have cash in dismally-paying accounts. That doesn't just deprive them of interest, but the chance to learn the valuable lesson that your money can work for you.

This is a full guide to the top-paying children's savings accounts, how tax for kids works, grabbing freebies and how to use their tax-free allowance for your gain.

Tips on teaching kids to save

The simple money lesson for younger children is obvious - put your cash in the bank and it'll grow. Yet as they get older there's another valuable lesson to be learned. A bank's job is to make money from you - our job is to try to keep our cash.

This may sound like a tough message to teach kids, but it's crucially important. The banks would like us to say "put your money in the bank", not "it's which bank you put your cash in that counts". So here's some top tips for helping kids learn and understand about saving.

Do children pay tax on savings?

There's a common myth that children don't pay tax - that's simply not true. In fact, they're taxed in exactly the same way as adults. Each child can, in the 2014-15 tax year, earn up to £10,000 tax-free from salary, savings or investments.

The difference is, unlike most adults, most children don't use up their allowance, so their savings interest is tax-free.

Assuming your child won't earn more than £10,000 (watch out child prodigies!), ensure any interest is paid without tax being automatically deducted by filling out the Inland Revenue's R85 form (the bank should give you one of these).

If you've already overpaid, you'll need to fill out an R40 form to get it back.

Special rules for money from parents

Is your child eligible for a junior ISA or Child Trust Fund?

Can a grandparent open an account for a grandchild living abroad, in the child's name?

Top kids' savings accounts

A wide range of account types are on offer, all paying different interest rates in a variety of ways. Below we've listed all of our top picks, in the order to consider them. Not every account suits everyone though, so be sure you understand 'em and are happy before picking.

Plus as noted above, make sure you take junior ISAs and Child Trust Funds into consideration too, as they may fit you well.

Best buys: Children's regular savings

Regular savings accounts require you to put a minimum amount of money away each month. In return, they often pay much more interest - and at present, the top pick's interest smashes all other best buys.

If you miss a month or need to withdraw cash you'll often lose the rate, so only consider this if you're sure you'll be able to pay cash in during the time period. For a more detailed explanation of how the interest works and pros and cons, read the full adults' Regular Savings guide.

Halifax Regular Saver 6% AER Earn high interest if you can save regularly.
Only available in Halifax branches.

Halifax
  • Rate: 6% AER fixed for 12 months
  • Monthly deposit: £10-£100
  • Withdrawals allowed?: No
  • Missed payments allowed?: Yes
  • Access: Halifax branches only
  • Min age: 0
  • Max age: 15

The Halifax Kids' Regular Saver pays a whopping 6% AER, fixed for a year. However, you can only pay in £10-£100/mth and no withdrawals are allowed, but you can miss monthly deposits. You can only get it in Halifax branches though - not via any other means, nor via Bank of Scotland.

As the 6% rate only lasts a year, the max pay-in is £1,200 - but at least the rate you're getting is huge. After a year, all the money is transferred to a Halifax Young Saver account (see below) - if its rate's no good, then ditch and switch.

Barclays Regular Saver 3.5% AER Decent rate, although has withdrawal penalties

Barclays
  • Rate: 3.5% AER fixed for 12 months
  • Monthly deposit: £5-£100
  • Withdrawals allowed?: Yes - but rate drops
  • Missed payments allowed?: No
  • Access: Branch only
  • Min age: 0
  • Max age: 18

The Children's Regular Saver from Barclays pays less than the Halifax account above, but is a good option if you don't have a Halifax branch near you.

The rate's a fixed 3.5% AER for a year, but drops to 1.51% for a month after you make a withdrawal - so try and keep these to a minimum.

You can save between £5 and £100 each month, but can miss payments and change the amount you pay as long as it stays within those limits.

The account must be opened and accessed by an adult acting as a trustee for a child under the age of 16. Kids can have the account until they're 18. Access to the account is in branch, but Barclays current account holders can also access the account online or by phone.

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Best buys: Children's easy access savings

If you don't fancy the regular savers, or have filled them, next best is a choice between...

  • The top easy access children's savings accounts, where rates can change both with the Bank of England's base rate and as providers change their competitive stance, or...
  • The top fixed savings, which give a guaranteed rate for a set period, but you can't take your money out during that time. These can be great for certainty on your return, but are only suitable if you're happy to lock cash away for the entire term.

We've plumped for the top easy access deals next as rates are slightly better, but go with whichever suits you best. All the accounts below have postal access - for some you can operate online, rates are terrible, so check top-paying adult accounts, and the top junior ISAs.

Halifax/Bank of Scotland 3% AER Top rate, unlimited withdrawals. Branch only.

Halifax
  • Rate: 3% AER variable
  • Min deposit: £1
  • Max deposit: £20,000
  • Min age: 0
  • Max age: 15
  • Access: Branch only

The Halifax or Bank of Scotland Young Saver account pays 3% AER without any bonuses, and allows unlimited withdrawals.

The account can be opened and accessed in branches by an adult trustee, or if the child is over seven they can have their own cash card. Make sure you fill out an R85 form to not pay tax on the interest.

Halifax and Bank of Scotland share one lot of £85,000 UK saving safety guarantee with the AA, BM Savings and Saga. Read the Safe Savings guide for full details.

Nationwide 3% AER Limited withdrawals, but can be opened & accessed online.

Nationwide
  • Rate: 3% AER variable
  • Min deposit: £1
  • Max deposit: £50,000
  • Min age: 0
  • Max age: 18
  • Access: Online or branch

The Nationwide Smart Limited Access account pays 3% AER on amounts up to £50,000.

It's an online account, meaning it's easy to manage, but the downside is that you can only withdraw money penalty-free once a year. If you need more frequent access you'll get a much lower 0.75% interest rate, so if that's likely to be the case, the Halifax account above might be a better fit as it allows unlimited withdrawals.

Kids can have the account until they're 18. Adults can open it on their child's behalf while they're still under 16, or kids can open it themselves from age seven.

Nationwides shares its £85,000 UK savings safety guarantee with Cheshire, Derbyshire & Dumfermline Building Societies. Read the Safe Savings guide for full details.

Skipton BS 2.75% AER Min £1, unlimited withdrawals. Branch/post only

Holmesdale
  • Rate: 2.75% AER variable
  • Min deposit: £1
  • Max deposit: £50,000
  • Min age: 0
  • Max age: 17
  • Access: Post or branch

The Skipton BS Leap Account (issue 2) is another decent easy access account, paying 2.75% AER on balances from £1 to £50,000, including a 0.5% bonus for a year. In addition, for every £20 saved in branches you'll receive a sticker to collect towards a choice of book.

It's available for those up to age 17 but for under-eights, an adult trustee will be needed to open and operate the account. This can be done in branch or by post.

Best buys: 3% Existing customer deals

The accounts below come with a big "but..." attached - a parent or guardian must also hold one of the same bank's current accounts, which may well be rubbish.

Lloyds Bank 3% AER Available to current account customers only

Lloyds
  • Rate: 3% AER variable
  • Min deposit: £1
  • Max deposit: £20,000
  • Min age: 0
  • Max age: 16
  • Access: Branch

Lloyds Bank current account customers can open the branch-access Young Savers account on behalf of a child, paying 3% on balances over £1. You'll maintain full responsibility for it until the child reaches 16. It'll then revert to a Lloyds Easy Saver.

The Club Lloyds* account is a top option, as it pays up to 4% interest on balances up to £5,000. However, you'll also need to pay in £1,500/mth (£5 fee if you don't) and pay out two direct debits. If you can't do this then its Lloyds Classic Account, is free to get and it doesn't have to be used as your main account to get the Young Saver.

HSBC 3% AER For 7-17 year olds. HSBC Premier account customers only

HSBC
  • Rate: 3% AER variable
  • Min deposit: £10
  • Max deposit: £3,000
  • Min age:7
  • Max age: 17
  • Access: Branch or phone

HSBC Premier account customers' children aged 7 to 17 can open the Premier MySavings account, paying 3% AER on balances over £10 and up to £3,000. The standard MySavings account pays 1% AER up to £3,000. For balances above this, both accounts pay 0.5% AER.

The account can be opened and operated by the child but for under-11s, permission from an adult trustee is required to withdraw more than £50. For over-11s, you'll also get a current account with a Visa debit card - this account can be managed online.

For existing HSBC Premier account holders, this is a good option but it's not worth opening the account just to get the children's savings benefits.

Best buys: Children's fixed savings

The longer you fix for, the more you are RISKING the fact that an unpredictable future means this could be a bad choice. If interest rates were to increase rapidly, you would lose the flexibility to ditch and switch to a better payer.

State Bank of India, up to 2.5% AER Fix for 1 to 5 years, apply by post or in branch

StateBank
  • Rate: 1 yr 2%, 2 yrs 2.25%, 3 yrs 2.5%, 5 yrs 2.5%
  • Min deposit: £500
  • Max deposit: £100,000
  • Min age: 0
  • Max age: 15

The Jumbo Junior Fixed Deposit Account from the State Bank of India UK pays up to 2.5% AER. You can choose terms from one to five years with a minimum deposit of £500, but the child must be no more than 15 when the account matures. So if a child is 14, only the one or two-year options would be available.

Interest is paid annually at these rates:

  • 1-year - 2% AER
  • 2-year - 2.25% AER
  • 3-year - 2.5% AER
  • 5-year - 2.5% AER

Withdrawals and early closures aren't permitted and futher deposits can't be made after opening. More than one account can be held, but the maximum across all of them must be less than £100,000.

This account can only be opened by an adult but can be held in the child's name. A parent or guardian must sign an R85 form for the child to receive the interest tax-free.

NS&I 2.5% AER fixedBranch, phone or post

Leeds
  • Rate: 2.5% AER fixed for 5 years
  • Min deposit: £25
  • Max deposit: £3,000
  • Min age: 0
  • Max age: 16

The NS&I Children's Bond (issue 35) pays 2.5% AER for five years on balances from £25 to £3,000. Withdrawals aren't allowed but you can close the account early, subject to a 90-day interest penalty.

The account can be opened online, by phone or post by parents, guardians or (great-) grandparents only.

Check your local building society too

Local building societies often pay very decent rates too. Check for offers for existing customers' children or for those living in the local area.

For a full list of children's savings accounts use the MoneySupermarket* and Moneyfacts comparisons, in conjunction with the Savings Safety guide to examine the protection for any accounts. However, with these it's crucial you double-check the rates on the banks' own websites before applying, as these comparison tables are NOT continually updated.

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The top children's savings freebies

Banks aren't stupid beasts. They know many people stick with their childhood bank throughout their adult life. So doling out a piggy bank or calculator is a cheap way to bag 20, 30 or even 40 years of custom.

Therefore, unless you're only putting in a small amount of money - so the freebie value outweighs anything else - you'll do far better to focus on interest. But once you've set up the best-paying children's account, you can do your kids a great service by teaching them a bit of banking disloyalty.

There's nothing stopping a child opening a range of accounts with the minimum deposit, usually £1, and grabbing a freebie for each. Just make sure you keep track of them.

Current children's freebies
Bank/society Account name Gifts or incentives
Co-op Bonus Account Educational gifts from Born Free Foundation
Earl Shilton BS Early Saver Piggy bank
Holmesdale BS Young Saver Free gift
NatWest Young Saver Piggy bank
Clydesdale Bank Jump Start Free gift
Mansfield BS Young Saver Piggy bank
Cumberland BS Young Savers Starter pack, incl calculator
Newbury BS Young Savers Welcome gift
Leeds BS DinoSaver Free gifts
Saffron BS Ladybird Issue 4 Ladybird money box
Ulster Bank Urfirst (0-11) Hippo money box
First Trust Bank Junior Saver Piggy bank
Danske Bank Junior Saver Penguin money box
Please note some building societies require you to be a local resident.
Last updated: April 2014

Use your child's tax-free allowance

'Using your children tax-efficiently' sounds slightly callous. But if you are better off, so are your kids. Saving money in a child's name means it's tax-free, and often at a higher rate of interest. It's perfectly possible to have one account for your child to put their pocket money into, and another for any larger amounts.

Know the tax implications

If it's their own money, children can earn the same £10,000 a year in interest as adults before it gets taxed. However, don't assume you can dunk fortunes in your kid's name.

If a child generates more than £100 interest in the course of the year, from money specifically given by each parent (or step-parent), this income is taxed at that parent's tax rate. So that's £200 for a couple with a child.

In practical terms this means you could put up to £6,600 in the 3% top paying children's account (£3,300 per parent), and it wouldn't be taxed, as that would generate around £99 each. Just to clarify, this doesn't mean £6,600 every year; it's the interest generated from all cash given in this and previous years.

One way around this is with junior ISAs, where £3,840 (in 2014/15) can be saved in the child's name and is free of tax regardless - read our full Junior ISA guide.

Also these rules only apply to parents, not grandparents, aunties, uncles or friends. They may all give your children as much as they like and, providing it's a genuine gift, it counts as the child's money without a £100 limit.

The only other tax implications of making cash gifts is the possible spectre of inheritance tax if the donor dies within seven years of making it.

A warning for bright sparks thinking: "If I gave my brother's kids £10,000 and he gave mine the same...?" Good thought, but no cigar. If the Inland Revenue spots you, you're in trouble.

Whose money is it anyway?

It's worth remembering if the money's in your child's name, it's your child's cash. Yet if you're worried that by putting £1,000 in their name they'll splash out on 52 ringtones, an Xbox and enough sweets to give a junior school a sugar rush, don't be. Many accounts will allow the adult to stay in control of the cash.

Most banks require a child to be at least seven before they can open an account for themselves, though they do all differ, so it's always worth checking the specifics. Under-sevens require a parent, guardian or grandparent to set up an account and act as signatory.

This method can also be selected for older children. If it is, then usually until they're 16 the signatory can still manage and withdraw the cash without the child's approval. Many accounts have terms and conditions stating withdrawn money must be used "for the benefit of the child," but of course, this encompasses a wide variety of definitions.

The size of the saving

For calculating the interest on children's savings, make sure you select the 'no tax' option below.

How much do you need to save? £
How much do you already have? £
How much can you save a month? £
What’s the interest rate? (before tax) %
How much tax do you pay? No Tax Basic Higher Additional
How much do you need to save? £
How much do you already have? £
What’s the interest rate? (before tax) %
When do you need it by? years and months time.
How much tax do you pay? No Tax Basic Higher Additional
How much do you already have? £
How much can you save a month? £
What’s the interest rate? (before tax) %
How far ahead do you want to look? years and months time.
How much tax do you pay? No Tax Basic Higher Additional

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