Savers Friend
®
Children’s Savings Guide
The lessons children learn in their formative years can stay
with them for the rest of their lives. So why parent handbooks
do not feel compelled to devote a chapter to encouraging the
savings habit from an early age is a mystery.
The options available in respect of
children’s savings are many. An array
of bank and building society accounts
vie for attention next to offerings from
National Savings and Investments
(NS&I) and Junior ISAs, amongst
others. Consideration has to be paid to
the issue of tax on children’s savings
too, though sufficient options should
be available to ensure youngsters
keep all of the money that is made.
Children’s accounts
Although most banks and building
societies offer special accounts aimed
at children, they will tend to operate in
the same way as ordinary savings
accounts and come in similar
variations too. Not to be distracted by
the free gifts that most children’s
savings accounts offer is the first thing
to remember. While a free piggy bank
might prove tempting to many young
savers, an additional 1% interest rolled
up over 18 years will be worth an
awful lot more.
Most children’s accounts are instant
access accounts which offer a variable
rate of interest and allow withdrawals at
any time. But while some parents want
the option to access money at will, the
rates payable on such accounts can
usually be bettered elsewhere.
To secure a higher rate, a certain
commitment will normally have to be
made in return. Fixed rate accounts,
for instance, pay a guaranteed rate of
interest for a set period of time during
which money should be left
untouched. Such accounts tend to be
best suited if there is a lump sum to
invest on behalf of a child, and the
money will definitely not be needed for
a long time. For those wanting to put a
smaller amount away each month,
regular savings accounts are the
popular option. In return for promising
to save a minimum amount on a
monthly basis, these accounts often
pay a higher amount of interest.
Tax and children
Although tax is a consideration for
young savers, in most cases a child’s
continued overleaf
GUIDES YOU
Key Facts
• Children’s savings accounts
from banks and building
societies come in similar
variations and tend to operate in
the same way as adult accounts.
• Although children are eligible to
pay tax on their savings,
allowances and the availability
of tax-free products means most
will not have to.
• NS&I offers two different taxfree products which are
popularly used to save for
children – Children’s Bonds
and Premium Bonds.
• In the 2015/16 tax year, the
maximum that can be saved into
a Junior ISA or Child Trust Fund
is £4,080.
• Since April 2015, it has been
possible to transfer from a Child
Trust Fund into a Junior ISA.
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Children’s Savings Guide page 1
Children’s Savings Guide continued
nest egg should not suffer at the hands
of HMRC. Interest earned on children’s
savings counts as taxable income,
but, from April 2015, anyone with
taxable income of less than £15,600
will not have to pay tax on their
interest. As long as a child’s annual
income is below this amount, any
interest earned can be paid gross,
without tax deducted, if a parent fills
out a Form R85 when the account is
opened. Similarly, completing a Form
R40 will see any tax claimed back
that should not have been paid.
While there is no limit on the amount
of money that can be saved on a
child’s behalf, parents depositing
large sums should be aware of a
potential tax implication. If money
contributed by a parent earns more
than £100 interest a year, this interest
will be taxed as if it were the parent’s.
It should be noted, however, that the
£100 limit applies to each parent,
giving a £200 limit in total if both
parents give money. While
grandparents and other adults can
give as much as they like without
such repercussion, it should be
remembered inheritance tax might be
payable if the donor dies within seven
years of making the payment.
NS&I
For those wanting to avoid the tax
minefield altogether, a number of taxfree savings products are available
specifically for children. A popular
option, not least because
Government-backing means
investments are effectively 100%
secure, are Children’s Bonds from
NS&I.
Running for a term of five years, the
bonds provide tax-free interest for
children under the age of 16, with up
to £3,000 allowed to be invested per
child per issue. On the fifth
anniversary, the bond can be
renewed, although final maturity must
be on its first five-year anniversary on
or after the child’s 16th birthday.
Although withdrawals can be made
from the bonds early, a penalty
equivalent to 90 days’ interest is
Last revised: 6th April 2015
deducted from the amount cashed in.
If the child is 16 or over on the
maturity date, they will be contacted
directly by NS&I as they will then be
responsible for the bond.
Not specifically designed for children,
but able to be purchased for minors in
trust, are Premium Bonds. While
Premium Bonds do not pay interest,
each bond number is entered in a
monthly prize draw. Two £1 million
top prizes are on offer, together with
smaller rewards ranging from
£100,000 to £25, all of which are paid
tax-free. Although the bonds can be
cashed in any time, and no penalty is
applied, it should be remembered
they offer no guarantee of a positive
return. Indeed, if no win is
forthcoming, inflation will reduce the
spending power of savings held as
premium bonds. The odds on winning
are approximately 26,000 to 1 each
month.
“For those wanting to
avoid the tax minefield
altogether, a number of
tax-free savings products
are available specifically
for children.”
CTFs and JISAs
Child Trust Funds (CTFs) and, more
recently, Junior ISAs (JISAs) are the
Government’s attempts to get the
nation’s youngsters saving. Unveiled
in April 2005, CTFs are tax-efficient
savings accounts available to children
born between 1 September 2002 and
2 January 2011. In an attempt to kick
start the savings process, qualifying
children received a £250 voucher
from the Government at birth to invest
into their CTF, with a further £250
promised on their seventh birthday
(vouchers increased to £500 for low
income families).
This generosity, however, proved the
eventual undoing of the CTF. In May
2010, the cash-strapped coalition
announced CTFs were to be
withdrawn. Although all Government
contributions stopped from 1 January
2011, existing accounts remain taxfree. In the 2015/16 tax year, parents,
friends and family can contribute up
to £4,080 per year. CTFs can be
transferred between providers to
secure better returns, and since April
2015 have been able to be
transferred into a JISA. It is an option
that has long been campaigned for
and given the higher rates of interest,
lower charges and wider choice of
investments that are typically
available among JISAs, one that CTF
holders should consider exercising.
Available to children under the age of
18 who are not eligible for a CTF,
JISAs were introduced in November
2011. As with CTFs, up to £4,080 can
be placed into a JISA in the 2015/16
tax year, with contributions able to be
made into cash and/or stocks and
shares, the two investment options
that JISAs offer. Importantly, as with
CTFs and adult ISAs, returns are taxfree, except for a 10% tax credit on
the dividends on stocks and shares.
The Government vouchers that came
with a CTF, however, are no more.
Loophole
Also worth pointing out is a loophole
which allows 16 to 18 year olds to
hold a cash ISA alongside a JISA.
While contributions can be made into
a Junior ISA up until a child is 18,
when a child turns 16, they are also
eligible to open a cash ISA. HMRC
has confirmed that youngsters in this
particular age group can therefore
save up to £19,320 tax-free each tax
year by making use of the £15,240
limit available on a cash ISA
alongside the £4,080 limit on a JISA.
Further alternatives
Less well known are Child Tax
Exempt Savings Plans (TESPs).
Available from Friendly Societies,
TESPs are tax-free stockmarket
based investments that must be held
for a period of at least ten years. Up
to £25 a month can be put into a plan
to eventually provide a tax-free lump
sum, which cannot be taken until the
child is at least 16. It is important to
remember that while stock market
exposure can deliver substantial
gains, there is also no guarantee that
money will not be lost.
Children’s Savings Guide page 2