Top Junior ISAs

Children are taxed just like adults, and just like adults that means that if they've no income they can earn up to £18,500 a year 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 (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 junior ISA rather than the top children's savings accounts:

1. You want to lock the cash away until they're 18. Junior ISAs 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.

2. If it's money given from parents they can only earn £100/yr from it in normal savings. Junior ISA 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-junior ISA) 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. 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 junior ISA would be a tax benefit, as then it's tax free. For a full explanation, read how kids' tax works.

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

If junior ISAs pay more, so you're thinking of it, do remember the money is locked away until 18. If rates change and kids savings pay more later, you won't be able to withdraw it and shift it there.

As soon as you put any cash in a junior ISA, it's locked away until your child reaches 18, at which point the cash becomes theirs. So consider carefully whether you're happy with not having control of what it's spent on.

This is a key point of where you decide to save. With normal kids' savings, you can access cash at will (until control of the account passes to your child, which tends to be around age 16). But, with a junior ISA, it's locked away – completely inaccessible – until they turn 18. You also don't have the same control about what happens to the cash. Know that...

It's their money. At age 18, they can do what they want with the cash

From the day the cash goes in a junior ISA, it's the child's money, not the parents'. So you must remember at age 18, whatever you've planned for the money – such as building a mortgage deposit for them – the money's actually entirely your child's, and they can do WHATEVER they want with it.

So while you may have a cute toddler now, they could grow up to be a rebellious 18-year-old. Even if that's just a phase, when the money in junior ISAs finally becomes accessible, on their 18th birthday, it becomes theirs to do as they will.

To take it to its extreme, here's a question Martin was asked: "Could I stop them if they wanted to buy drugs with it?" The answer is no.

So if you're saving for a university fund, for example, (see our Don't Pay Tuition Fees Upfront guide) there's a risk with using a children's ISA that you just don't have if you're using a normal savings account. Saving in your name (assuming the interest doesn't take you over your personal savings allowance) could be safer.

Kids can save £4,368 per tax year (for 2019/20) in a junior ISA. The tax year runs from each 6 April to the following 5 April, and it's important to remember you'll lose unused allowances (or portions of them) for good. However, once in the children's ISA wrapper, they remain efficient year after year.

You can only open one junior cash ISA and one junior shares ISA per tax year, and you can split the £4,368 allowance between them as you wish. You can transfer providers as much as you like, but can only hold one of each type at any one time.