All savings put into CTFs are free from both income and capital gains tax, and the Government has confirmed there are no plans to change this, even though the spotlight has moved on to junior ISAs. Technically, inheritance tax rules apply. However, unless it's a large gift from grandparents, this is likely to be irrelevant (read the Inheritance Tax guide for more details).

It won't be worth it for most unless they pay more than normal kids savings

Children are taxed just like adults, and just like adults that means that if they’ve no income they can earn up to £17,850 a year from savings without paying tax on it (that's the £11,850 personal allowance + £5,000 starting savings allowance + the £1,000 personal savings allowance (PSA)).

Even in the unlikely event they have real income, the personal savings allowance, introduced in April 2016, allows them to earn up to £1,000 a year interest tax-free (unless they become higher rate taxpayers in which case… WOW!)  

So these days there are only three main reasons you’d put new money into a Child Trust Fund rather than the top children's savings accounts

1. You want to lock the cash away until they're 18. Child Trust Funds mandate this so it's an easy way to do it. Though as we explain below, you need to be prepared that this means on their 18th birthday, the money is theirs to do with as they please.  Also bear in mind you may be better off transferring your CTF to a junior ISA.

2. If you're a parent giving money that'll earn more than £100/yr interest. Child Trust Fund savings are tax-free and remain tax-free year after year.

Yet money given to a child by each parent or step-parent (not grandparents, aunts, uncles etc) which generates more than £100/year in interest in normal (non CTF) savings will be paid at the parent's tax rate.

So the £100 allowance is on a 'per parent' basis, rather than a 'per child' basis.  The aim's to stop parents using their kids' tax-free allowance for an extra allowance.

Once the child earns more than this, the whole lot is taxed at the parent's tax rate. Yet even then if the parent is within their personal savings allowance and the child's savings don't take them over, then it'd still be tax-free. 

Yet if the child goes over the £100 limit and the parent is over the PSA then their savings would be taxable – in which case saving it in a Child Trust Fund (or a junior ISA) would be a tax benefit, as then it’s tax-free. For a full explanation, read how kids' tax works. 

3. If Child Trust Funds pay more than normal savings.  Even if there’s no tax advantage for your child, then if the rate is higher, as it can sometimes be, then you could save in a Child Trust Fund for them. So compare the CTF rates below to the top kids' savings rates and top junior ISA rates.  

If the Child Trust Fund pays more, so you’re thinking of it, do remember the money is locked away until 18. So if rates change and kids savings pay more later, you won’t be able to withdraw it and shift it there. 

You won't have any control over the money

On the surface a CTF is a good way to save for your child's future. Yet it has two major drawbacks.