Best Child Savings

Your children are a secret weapon against tax! Parents can put up to £9,000 in a 2.2% interest savings account in their child's name without paying tax on it. This is the best-paying children's savings accounts both for them and for you.

• 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 use up their allowance, so their savings interest is tax free if they eanr less than the personal allowance.

The other proviso is that any money deposited by a parent is only tax free on reutrns up to £100, per parent. If you earn more than £100, the whole income is taxed at the parent's rate.

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.

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

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
• Abbey - savings wall 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

All of these accounts are Regular Savers. Before opening, read the full Regular Savings guide for full pros and cons including how the interest works and how to dripfeed a lump sum.

• Halifax Regular Saver 6% AER. Earn interest if you can save regularly
  
  The Children's Regular Saver from Halifax pays a whopping 6% AER, 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 1.05% interest for the whole period.

  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 (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.

  Quick Stats: Rate: 6% AER fixed for 12 months Monthly Deposit: £10-£100. Access: Online/Branch/Post

• Norwich and P'borough Family Regular Saver 6% AER. For familes with kids
  
  Alternatively, N&P's Family Regular Saver pays 6% AER for familes with kids up to the age of 16 (or 18 if they are in full-time education) saving between £1 and £250 per month for a year. The rate on the account drops to 3% 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.

  Quick Stats: Rate: 6% AER fixed for 12 months Monthly Deposit: £1-£250. Access: Online/Branch/Post/Phone

• Principality Regular Saver 5% AER. Save between £10-£150 per month
  
  If you want to save a bit more Principality pays 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.

  Quick Stats: Rate: 5% AER fixed for 12 months Monthly Deposit: £10-£150. Access: Branch/Post

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.

• Loughborough BS 2.2% AER. Top rate, branch/post only
  
  If you've used up Halifax's regular saver, or don't want the restrictions, then the next highest rate is Loughborough Building Society's Young Savers +, which pays 2.2% on savings over £1 (max £20,000). It's operated by branch or post, and is instant access.
  

  Quick Stats: Rate: 2.2% AER variable Min. Deposit: £1. Access: Branch/Post

• Chorley BS Up to 2.2% AER. Tiered rate, branch/post only
  
  Close behind is Chorley BS's Young Chorleian account, paying a tiered rate of 2% on savings between £5 and £4,999, 2.1% from £5,000 to £9,999 and 2.2% for over £10,000 (max balance £15,000). There are some limits on how much you can withdraw per day/week, for more info see their withdrawals page, the account can be operated via branches or post.

  Quick Stats: Rate: Tiered up to 2.2% AER variable Min. Deposit: £5. Access: Branch/Post

• Chelsea BS 2% AER. Branch/post only
  
  Another Building Society, Chelsea BS's Ready Steady Save, pays 2% on savings over £1 (max £20,000). Again it can only be operated by branch or post.

  Quick Stats: Rate: 2% AER variable Min. Deposit: £1. Access: Branch/Post

• Halifax 1.05% AER. Top rate for partial online access
  
  If you want to view your balance online, Halifax is top again; its instant access Save4it account pays 1.05% from £1. You can apply in branches or over the phone.
  
  Behind this, Nationwide's Smart account pays 0.75% from £1, this is a branch based account, but over 11 year olds can also access it by phone or online.
  

  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.

  Halifax Quick Stats: Rate: 1.05% AER variable Min. Deposit: £1. Access: Online/Branch/Post

  Nationwide Quick Stats: Rate: 0.75% AER variable Min. Deposit: £1. Access: Online/Branch

• More ways to get a top rate.

  Local building societies often pay very decent rates too, so check there for offers for existing customers' children for those living in their 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 the comparison tables are NOT continually updated.

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

If it's their own money, children can earn the same £6,475 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, 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 £9,000 in the 2.2% top paying children's account (£4,500 per parent), and it wouldn't be taxed, as that would generate around £99 each. Just to clarify, this doesn't mean £9,000 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 £89 more for kids of a higher rate taxpayer than the top paying adult instant access savings account.