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

It's possible for children to earn up to 6% in the top savings accounts - yet many have cash in dismally paying accounts, not just depriving 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 to 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 and 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.

• The difference between piggy banks and real banks

  Here's a handy simple explanation: "Put your cash in a piggy bank and it sits there, but put it in a real bank and you're actually lending them your money - so they need to pay you for it.

  "The amount you're paid is called interest and the higher the interest on savings and the longer you keep it with them, the more they are paying you. If the interest is 10%, that means they pay you 10p a year for every pound that you save with them."

• Pick the account together

  Look through the best buys together, explaining accounts pros and cons (if you're unsure see interest rates for beginners and make the decision together). Better still go to your local bank or building society and get your child to ask for an account there and compare its deal with the best here.

• Talk through freebie grabbing

  Explain that many banks try and tempt you in with freebies, but often they're the ones that don't pay good interest. So pick an account for interest, then discuss opening other accounts with just the minimum balance to grab the freebies (see best freebies).

• Get them to monitor the rate

  If you go for an easy access or variable rate deal, put your child in charge of checking the interest every month to see if it's still paying a decent rate and move it if not.

• Is it safe?

  It's an interesting discussion to have with children. There's a balance here, a piggy bank is kept at home where you can see it though it can be stolen (don't say that if it'll scare them). Yet, money in the bank is safe and earns interest, but there's a very slight risk the bank may collapse.

  However if it does, provided it's a UK regulated account (all those listed below are) the money is protected up to £85,000 per person by the government (see the safe savings guide) which is as safe as we can hope for.

• Defer an element of pocket money

  One easy trick is to defer an element of pocket money to show the extra reward from savings. For example, if their pocket money is £3, give them one for spending and another for saving. Then tell them for every pound they do save you'll give them an extra one at the end of the year as a reward. For more pocket money tips see Martin's give pocket money as pay blog.

These are just the tip of the iceberg, for more see the free teen cash class PDF, Martin's moneysaving tips for nine year olds blog (and ensuing discussion) plus the things teens need know about cash discussion and full Financial Education Campaign section. You should also check you're with the best child trust fund and now, the best Junior ISA, availablet for those born before 1 September 2002 and after 3 January 2011.

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, which means each child can in the 2011-12 tax year earn up to £7,475 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 £7,475 (watch out child prodigies!), ensure any interest is paid without the tax being automatically deducted by filling out the Inland Revenue 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

However, there's a proviso that any interest earned on money specifically given to them by a parent is only tax-free up to £100 interest, per parent or step-parent. If your child earns more than £100, the whole lot is taxed at the parent's rate.

Children's Best Buy Regular Savings

Regular savings accounts require you to put a minimum amount of money away each month, in return they often pay a much higher amount of interest.

However if you miss a month or need to withdraw cash you will 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 adult's Regular Savings guide.

Halifax Regular Saver 6% AER.

Earn high interest if you can save regularly. Only available in Halifax branches.

The Children's Regular Saver from Halifax pays a whopping 6% AER, fixed for a year.Yet there are some conditions.You must pay in between £10 and £100 every month and no withdrawals are allowed, but you can miss monthly deposits. Please be aware applications can only be made in Halifax branches, this account is not available via the Bank of Scotland.

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 Young Saver account (see below), so do ensure you monitor its rate then and if it's not good shift it somewhere else to improve it.

Quick Stats: 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: 16

Norwich and P'borough Family Regular Saver 5% AER.

For adults with kids

This isn't a children's account, it's an adult account for parents with kids up to the age of 16 (or 18 if they are in full-time education), yet at such a high rate it's worth a mention as it's designed to allow you to save for your kids. However do note you'll be taxed at your rate.

The N&P Family Regular Saver pays a fixed rate of 5% AER, when saving between £1 and £250 per month for a year. The rate on the account drops to 2% if you miss any payments or make more than one withdrawal, and to a variable rate (currently 0.5%) after the first year.

You can open the account by post, phone or branch and operate it online once open. As this is an adult account it will only be in the name of the parents.

Quick Stats: Rate: 5% AER fixed for 12 months Monthly deposit: £1-£250. Withdrawals allowed?: 1 allowed Missed payments allowed?: No Access: Online/Branch/Post/Phone Restrictions: For adults with children up to 16 (or 18 in FT education)

Principality Children's Regular Saver 4.5% AER.

Save between £10-£150 per month

The Principality Dylan regular saver (issue 3) for children pays a fixed rate of 4.5% AER, when you deposit between £10 and £150 per month for a year. The restrictions are similar to Halifax, you cannot miss payments or withdraw your cash, or your account will change to the standard childrens account, paying just 0.9% AER.

After a year the account will revert to the low paying children's account, so ensure you switch to a top paying one (see below). The account can only be accessed in branches or by post.

Children over 14 years old can open an account themselves, otherwise it must be opened by an adult in the child's name. You'll need to fill in an R85 form for the child to be able to receive the interest without tax.

Quick Stats: Rate: 4.5% AER fixed for 12 months Monthly deposit: £10-£150. Withdrawals allowed?: No Missed payments allowed?: No Access: Branch/Post Min. age: 0 Max. age: 16

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Best Buy Children's Fixed Savings

Most childrens savings accounts are variable, meaning the rate can change both with the Bank of England's Base Rate and as providers change their competitive stance.

Fixed rate savings are the alternative, they give a guaranteed rate for a set period, but you can't take your money out during that time, so are only suitable if you're happy to lock cash away for the entire term.

How long to fix for?

The longer you fix for, the more you are RISKING the fact that an unpredicatable future means this could be a bad choice.

If interest rates were to increase rapidly, you would've lost the flexibility to ditch and switch to a better payer. As at March 2011, pundits were predicting base rate hikes this year, so it's important to go into fixeds with your eyes open.

Yorkshire & Clydesdale Bank 4.25% AER.

Fixed for 5 years, branch only

For those with a Yorkshire or Clydesdale Bank near them (there are 340 branches across the country) can open one of their Child savings bonds paying 4.25% AER for 5 years. It's for kids aged under 16, the minimum deposit is £50 and maximum is £250,000 although only one deposit can be made.

This account can only be controlled by an adult. A parent or guardian must sign an R85 form for the child to receive the interest tax free.

Quick Stats: Rate: 4.25% AER fixed for 5 years Min deposit: £50 Max deposit: £250,000 Min age: 0 Max age: 16

Halifax, up to 4.2% AER.

Fix for 1- 5 years, apply in branches only

The Kids Fixed Saver from Halifax pays up to 4.2% AER. You can choose terms of one to five years with a minimum deposit of £500. Interest can be paid annually or monthly and the rates offered are detailed below:

• 1 year - 2.25% AER
• 2 year - 3.7% AER
• 3 year - 4% AER
• 4 year - 4.1% AER
• 5 year - 4.2% AER

Withdrawals are not permitted and early closure will result in a penalty of up to 365 days interest, depending on the length of the term.

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.

Quick Stats: Rate: 1 yr 2.4%, 2 yrs 3.4%, 3 yrs 4%, 4 yrs 4.1%, 5 yrs 4.2% Min deposit: £500 Max deposit: £1 million Min age: 0 Max age: 15

Post Office, up to 3.75% AER.

Fix for 1-3 years, apply by phone or branch

The Growth Bonds (issue 16) from Post Office are adult accounts that can also be opened for a child. You can choose terms of one, two and three years with a minimum deposit of £500. Interest is paid annually and the rates offered are detailed below:

• 1 year - 3.25% AER
• 2 year - 3.75% AER
• 3 year - 3.76% AER

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.

Quick Stats: Rate: 1 yr 3.25%, 2 yr 3.75%, 3 yr 3.76% Min deposit: £500 Max deposit: £1 million Min age: 0 Max age: n/a

Leeds Building Society 3.35% AER.

Branch or post only, allows withdrawals

The Leeds BS Young Investor Fixed Rate Bond (issue 2) pays 3.35% AER for 5 years. That is a long time to lock cash away - though for kids you are often saving for the future, and you have the option to withdraw up to 25% of your balance without any loss of interest.

You can open the account in branch or by post, with a minimum of £100. Interest is paid annually on 30 June.

This account can be opened only in the child's name, but a trustee is also required. Over 12's can withdraw up to £250 without needing additional permission but under 12's need the trustee to authorise withdrawals.

Quick Stats: Rate: 3.35% AER fixed for 5 years Min deposit: £100 Max deposit: £1 million Min age: 0 Max age: 17

Northern Rock 3.3% AER.

Fixed for 3 years, post or branch

If you want to fix for a shorter time the Northern Rock Little Rock fixed rate bond (issue 6) pays 3.3% until 1 September 2014. You can open the account with just £1 and can save up to £20,000, although once the account is withdrawn they won't accept any further deposits.

The account can be opened by post or in branches by the parent or guardian of the child.

Quick Stats: Rate: 3.3% AER fixed until 1 Sept 2014 Min deposit: £1 Max deposit: £20,000 Min age: 0 Max age: 16

Best buy Children's Easy Access Savings

With these accounts you or your children can take money out whenever you need, but the rate is variable so you need to watch it carefully - if it does drop, move the cash! It's worth mentioning that kids can't open adult ISA's as you have to be 16 years of age to hold one, although they can now open a Junior ISA.

Northern Rock 3% AER.

Top rate, branch/post only

The top variable rate account is Northern Rock's Little Rock (issue 2) account paying 3% AER from £1, up to £10,000. The account is for under 16's and can only be opened in branches.

The account will be in the name of the child and needs an adult to be the trustee. An R85 form must be filled out for the child to receive gross interest.

Quick Stats: Rate: 3% AER variable Min deposit: £1. Max deposit: £10,000 Access: Branch Min age: 0 Max age: 16

Halifax / Bank of Scotland 2% AER.

Branch only, unlimited withdrawals

The Halifax or Bank of Scotland Young Saver account pays 2% AER without any bonuses.

It allows unlimited withdrawals and can be opened and accessed in branches, by an adult trustee. You can also view the balance online.

Ensure you fill out an R85 form to not pay tax on the interest.

Halifax shares its £85,000 UK saving safety guarantee with the rest of the HBOS group, read the Safe Savings guide for full details.

Quick Stats: Rate: 2% variable AER. Min deposit: £1. Max deposit: N/A Access:Online/Branch Withdrawal restrictions: N/A Min age: 0 Max age: 16

Nationwide 0.75% AER.

Top with online access for under 16s

The Smart account from the Nationwide pays 0.75% from £1, this is a branch based account, but over 11 year olds can also access it by phone or online.

This account can be opened for any child up to 16 years with an adult. Children over 7 can apply for an account by themselves.

The rates for these online accounts are nothing to shout about, so it would be worth comparing with the top paying adult accounts and paying the tax on the interest.

Nationwide Quick Stats: Rate: 0.75% AER variable Min deposit: £1. Max deposit: £2 million Access: Online/Branch Min age: 0 Max age: 18

The Top Children's Savings Freebies

Banks aren't stupid beasts. They know many people stick with their childhood bank through adult life. So doling out a piggy bank or calculator is a ridiculously 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're far better to focus on interest. However once you've set up the best paying childrens 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.

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 in, and another for any larger amounts.

Know the tax implications

If it's their own money, children can earn the same £7,475 a year in interest as adults can 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 parents' 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.

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. Yet if you're worried that by putting £1,000 in their name they'll splash out on 52 ring-tones, 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, 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.

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