 Taxing Children
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 Johnny, let me tell you about hedge funds.... |
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 £5,225), 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.
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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. Bank of Scotland has one of the worst childrens' accounts, called ExpressCash, which pays a disgraceful 1.51%.
Branch, phone and postal access
The best payer is Chelsea BS's Ready Steady Save, which pays 5.45% on savings from £1 up, closely followed by Yorkshire Building Society's One Day account, paying 5.4% on savings from £10. Both of these are open to all at local branches.
Do check your local building society too as some pay higher rates for existing customers' children or those living in their local area.
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. As customers of Alliance & Leicester's Firstsaver account discovered, once the best buy, it disgracefully slashed its interest by a third!
However, generally childrens' savings account rates change less than adult accounts, but it's still important to monitor them regularly; it's a good lesson for children to learn.
And if the rate does drop, move the cash. It is also possible to get a fixed rate kids' savings account, where the money is locked away.
There's one account that spanks the bottom of all the others, Halifax's Children's Regular Saver account, which pays a whopping 10%. Before you rush off to grab it, there are some important restrictions you'll need to know about.
Regular Savings accounts only allow deposits up to a capped value each month and, as you'd expect from the name, you have to make one each month to maintain the account (read my full Regular Savings Accounts article for more information on the pros and cons of these accounts).
Halifax allows variable deposits of £10-£100 each month, meaning the most you can pay in is £1,200 a year; but as it only lasts a year, the average balance you can have in is £600. Not such a huge sum, but it still pays better than elsewhere.
More good news is that any adult can open 1 account in trust for any given child 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 10% paying accounts can be opened.
The 10% rate is only guaranteed for a year, at which point all the money is transferred to a Halifax Save4it account (which is a decent payer – see above). Also, should you miss any payments during the year, only the Save4it's rate will be earned – currently 6.05%
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. Now high rates of interest are being earned on the full amount.
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Daily Updated Child Savings Best Buys | ||
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What if rates change? That's the idea of the link below, which takes you to comparison service Moneysupermarket's best buys.
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External Price Comparison* |
Click ‘Childrens savings' option | |
‘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.
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 £1,850 in the 5.7% top paying children's account, and it wouldn't be taxed, as that would generate around £105. Just to clarify, this doesn't mean £1,850 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 7 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 £70 interest, but by picking the best you could boost the returns to £270. This is £100 more for kids of a higher rate taxpayer than the top paying adult instant access savings account.
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£1,500 in a child's instant access saving account over 3 years | |||
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Rate |
Interest Earnt |
Extra Interest (5) |
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Poor Adult Account (1) |
0.4% |
£14 basic rate tax £11 higher rate taxpayer |
N/A |
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Poor Childrens' Account (2) |
1.51% |
£69 |
£58 |
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Top Adults' Account (3) |
5.75% |
£ 220 basic rate taxpayer £165 higher rate taxpayer |
£206 £154 |
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Top Childrens' Account (4) |
5.7% |
£ 270 |
£259 |
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Rates at time of writing article, for the sake of illustration assumes rates are fixed (1) Citibank Instant Access (2) Bank of Scotland ExpressCash (3) HSBC Online Saver (4) YBS One Day (5) over worst payer for higher rate taxpayer | |||
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