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While interest rates for grown-up savers have been dropping, children can still earn up to 3.5% on their savings – but many have cash in accounts that pay dismal amounts, depriving them not only of interest, but the lesson that your money can work for you. This is a guide to the top-paying children's accounts, including how to use their tax-free allowance for your gain.
The simple money lesson for younger children is obvious – put your cash in the bank and it'll grow. But as they get older there's another lesson to be learned – a bank's job is to make money from you, our job is to try to keep our cash.
So here are some top tips for helping kids learn and understand about saving and everything else you need to know about kids' savings.
Rather watch than read? Martin Lewis explains children's savings accounts
The clip below lasts four minutes and 18 seconds and has been taken from The Martin Lewis Money Show on Thursday 17 December, courtesy of ITV Studios Ltd, all rights reserved. You can turn on subtitles by selecting the keyboard image at the bottom right of the video.
Just bear in mind that the savings rates mentioned are subject to change – check the tables below for the most up-to-date rates.
Here's a handy simple explanation: "Put your cash in a piggybank 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. The higher the interest on savings and the longer you keep it with them, the more they pay you. If the interest is 10%, that means they pay you 10p a year for every £1 you save with them."
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, get your child to ask for an account there and compare its deal with the best here.
Plus, don't let them be swayed by cute toy freebies – explain that many banks try to tempt you in, 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.
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. Move it if not.
It's an interesting discussion to have with children. There's a balance here. A piggybank 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.
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, which is as safe as we can hope for. See our Safe Savings guide for more.
One easy trick is to defer an element of pocket money to show the extra reward from saving. For example, if their pocket money is £3, give them half for spending and half for saving. Then tell them for every pound they save, you'll give them an extra one at the end of the year as a reward. For more tips, see Martin's blog: Give pocket money as pay.
However, most children don't have jobs or earned income. And for the 2020/21 tax year, if they've no income they can earn up to £18,500 from savings without paying tax on it (that's the £12,500 personal allowance + £5,000 starting savings allowance + the £1,000 personal savings allowance).
Even if they do have income to pay tax on, the personal savings allowance means basic-rate taxpayers can earn £1,000 of savings interest tax-free.
Yet there is one fly in the ointment...
If money is given by a parent or step-parent (not grandparents etc) and the interest earned on it is over £100/year from non-ISA savings, the whole thing is taxed like it's the parent's cash.
The £100 allowance is on a 'per parent' basis, rather than a 'per child' basis. The aim is to stop parents using their kids' tax-free allowance for an extra allowance.
Once the child earns more than £100 per parent, the whole lot is taxed at the parent's tax rate. But even then, if the parent is within their personal savings allowance and the child's savings don't take them over, it'd still be tax-free.
However, if the child goes over the £100 limit and the parent is over the PSA, their savings would be taxable, in which case saving it in a junior ISA would be a tax benefit, as then it's tax-free.
Whether you should get a junior ISA depends on two things – if your kids pay tax now (almost all don't), and if you want to lock the cash away, or retain more control over it.
If your kids don't pay income tax (child prodigies watch out!) then they'll be able to earn £18,500 in savings interest before having to pay tax on it, meaning that a junior ISA isn't really necessary.
But if they'll have high levels of savings once they turn 18, a junior ISA could be a good plan, as these convert to full cash ISAs when the child turns 18, meaning they remain permanently tax-free.
Junior ISAs lock cash away until the child turns 18 – at which point it's their money. With the accounts in this guide, most allow access at any time, giving you more control.
"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 you often save 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.
But the personal savings allowance (PSA) has made this less of an issue. This is because, as we've said above, it allows basic-rate taxpayers to earn £1,000 in interest each year without paying tax on it (£500 for higher-rate payers, nothing for additional-raters). Though it's still worth considering if you're close to maxing out your PSA.
If it's their own money, children can earn the same £18,500 a year in interest as adults before it gets taxed. However, don't assume you can dunk fortunes in your kid's name.
As we've explained, if a child generates more than £100 in interest over the course of a year, from money specifically given by each parent (or step-parent) (so £200 for a couple with a child), this income falls under that parent's PSA. And if they've used their allowance up, it'll be taxed at their rate.
One way around this is with junior ISAs, where £9,000 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 £20,000 and he gave mine the same...?" Good thought, but no cigar. If HM Revenue & Customs spots you, you're in trouble.
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 100 apps, a Nintendo Switch 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 until the child turns 16. When they do, the cash is technically theirs to do with what they wish.
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 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.
These accounts let you save up to £100 a month, usually for a fixed term of a year – so are good for small sums. They often pay high rates of interest, but tend to have withdrawal restrictions. For a more detailed explanation of how the interest works and the pros and cons, read our full adults' Regular Savings guide. Or take a look at the top payers below.
If you're looking to save smaller amounts every month, the kids' regular saver from Halifax is our top pick. It pays the joint-highest rate at 3.5% fixed for a year, lets you save up to £100 a month and you can open it online – though it doesn't allow withdrawals.
Barclays' branch-based account pays the same rate of 3.5%, also fixed for a year. It lets you make withdrawals, but the rate drops to 1.51% for a month if you do – meaning it's still best to avoid taking cash out if possible.
With easy-access accounts, you add money at will and all the accounts below let you withdraw it just as easily. Plus, they all let you save a decent lump sum in them. Yet rates can change – so it's important to keep an eye on your account and switch if there's a better deal.
Easy-access accounts are best for saving bigger lump sums – and which account you go for will largely depend on how much you have to save.
If you've got between £1,500 and £2,000, Santander's 123 Mini pays the highest rate at 3% – though if your child's under 13, you'll need your own Santander current account and have to open the Mini account in branch.
Alternatively, HSBC pays 2.5% on £10 to £3,000 for children aged 7+.
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