Best Child Savings

Your children are a secret weapon against tax! Used correctly each child is a way to put an extra £1,900 in a high interest savings account without paying tax on it. This week's deal is the best-paying childrens' savings accounts both for them and for you – possibly increasing your interest five fold.

• Taxing Children
• Choosing an account for your child
• Best Buys: The Top Accounts
• Maximise your child's tax free allowance
• Related Articles / Discuss

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Taxing Children

First let's dispel a myth; childrens' savings are NOT automatically tax free. In fact they're taxed identically to adults, so each child, just like each adult, has an annual personal allowance (currently £6,475), the amount earnable from salary, savings or investment income before it's taxed.

The difference is unlike most adults, most children don't fill their allowance up with earnings, so their savings are tax free. Assuming your child won't earn over the limit, ensure any interest is paid without the tax being automatically deducted, by filling out the Inland Revenue R85 form the bank should give you.

Choosing an account for your child

First bag all the freebies you can

Banks are not stupid beasts. They know many people stick with their childhood bank through adult life. So doling out a piggy bank or calculator is cheap in return for the next 20, 30 or even 40 years of custom.

Yet teaching children disloyalty to banks is a great service. Choosing a child's savings account based on freebies is fine if you're only putting a small amount of money in – then the freebie's value more than outweighs any interest earned.

In fact there's nothing stopping a child opening a range of accounts with the minimum deposit, usually £1 and grabbing all the freebies.

Current offers include:

• Halifax - a calculator and moneybox
• Lloyds TSB - a moneybox and a height chart

Most banks admit nothing prohibits a child opening a savings account if they already have one elsewhere.

Then grab the highest interest rate

If there is any real money going into an account, the focus must be interest rates. Many childrens' accounts pay better rates than the ‘adult' equivalents, though some still try to sucker in the Nation's little 'uns.

The Top Payers

Unless stated, all the accounts have full protection under the £50,000 per person, per institution rules. Though do check how institutions are linked and other notes in the safe savings guide.

Top Fixed Kids Savings

• Halifax Regular Saver 6%. Earn interest if you can save regularly
  
  Halifax's Children's Regular Saver account, pays a whopping 6%, fixed for a year. Yet there are some pretty strict conditions; you must pay in between £10 and £100 every month, and if you miss a monthly payment, or make a withdrawal, the account's closed and you only get 1.55% interest for the whole period (read my full Regular Savings guide for full pros and cons of these accounts).

  As the 6% rate only lasts a year, the maximum you can pay in is £1,200, meaning the average balance you can have in is £600. Not such a huge sum, but it still pays better than elsewhere. After a year, all the money is transferred to a Halifax Save4it account (which is a decent payer - see below).

  However, you can beat this restriction, as ANY adult can open 1 account in trust for any given child under 16 i.e. If Mum, Dad, Uncle Jack, Aunty Jill and Dave from down the pub all want to open an account in trust for little Tommy, then 5 of these 6% paying accounts can be opened.

  To maximise the interest potential of this high rate, you can stash the whole £1,200 in a savings account rather than a current account, then drip-feed the monthly payments from there into the Halifax Regular Saver so high rates of interest are being earned on the full amount.

Top Variable Kids Savings

These interest rates aren't fixed. They can change both with Bank of England UK base rate moves and as Banks decide to be more or less competitive, so it's important to monitor them regularly; a good lesson for children to learn. If the rate does drop, move the cash! For fixed rate kids' savings account, where the money is locked away, see above.

• Chelsea BS 2%. Top rate, but branch/post only
  
  If you've used up Halifax, or don't want the restrictions, then the next highest rate is Chelsea BS's Ready Steady Save, which pays 2% on savings from £1 up. It's operated by branch or post, and is totally instant access.
  
  Close behind is Yorkshire Building Society's One Day account, paying 1.75% on savings from £10. You can make unlimited penalty-free withdrawals, and it's operated via branches only.
  

  In April 2009, financial strength rating's agency Moodys substantially downgraded a heap of banks and building societies, including Chelsea and Yorkshire (read Building Society Downgrades news) meaning it's more important to be watchful about not going beyond the £50,000 government guarantee. For full info read the Are Your Savings Safe? guide.

  
  
• Halifax 1.05%. Top rate for online access
  
  If you want online access to the account, Halifax is top again; its instant access Save4it account pays 1.05% from £1 and is available online, in branch or over the phone.
  
  Behind this, Nationwide's Smart account pays 0.75% from £1, and can be managed at a branch or online.
  

  In April 2009, financial strength rating's agency Moodys substantially downgraded a heap of banks and building societies, including Nationwide (read Building Society Downgrades news) meaning it's more important to be watchful about not going beyond the £50,000 government guarantee. For full info read the Are Your Savings Safe? guide.

Local building societies often pay very decent rates too, so check there for offers for existing customers' children or those living in their local area.

Maximising 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 in, and another for any larger amounts.

Know the tax implications

Children can earn £100 interest per year before you're taxed on it. 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, this income is taxed at that parents' tax rate.

In practical terms this means you could put up to £4,400 in the 2.25% top paying children's account, and it wouldn't be taxed, as that would generate around £99. Just to clarify, this doesn't mean £4,400 every year; it's the interest generated from all cash given in this and previous years.

Yet 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. And a quick warning, for those bright sparks thinking, “if I gave my brother's kids £10,000 and he gave mine the same….”, well 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 is your child's cash. If you're worried by putting £1,000 in their name that they'll splash out on 52 ring-tones, a Barbie and enough sweets to give a junior school a sugar rush, don't be. Many accounts will allow you to stay in control of the cash.

Most accounts 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, and if it is, then usually until they're 16 the signatory can still manage and withdraw the cash without the child's approval. Do note many accounts have terms and conditions stating withdrawn money must be used “for the benefit of the child,” but this of course encompasses a wide variety of definitions.

Save £1,500 in a poor-paying children's account over three years and you'd earn £5 interest, but by picking the best you could boost the returns to £100. This is £95 more for kids of a higher rate taxpayer than the top paying adult instant access savings account.