Children, savings
accounts & tax
You can save as much money for your child as you like but there are tax implications and if you don’t understand them you may find that the bank or building society automatically deduct 20% tax on the interest as they would for any other savings account.
Opening a savings account
Opening a savings account for your child is easy and there are lots of banks and building societies out there offering accounts that are specifically aimed at children. These accounts often offer slightly better rates than standard accounts too. In most cases a child can't have the account in their own name until the age of seven. Until this time a parent or guardian has to be the signatory.
Your child’s tax free allowance
Basically children have the same personal tax allowance that you do, £6,035 a year. The difference is that most adults use up their tax free allowance with the first £6,035 of their income. For children this obviously isn’t usually the case, so as long as their annual income is less then this amount then they wouldn’t pay tax on it.
For example : £120,000 in a savings account earning 5% per annum interest provides £6,000 income which is still just below the tax threshold. Note, if the following financial year the interest is reinvested then the amount becomes £126,000 and the same interest rate would earn £6,300 in interest. The last £265 of this would exceed the child’s personal allowance and be liable to tax. Periods for calculations are based on the HMRC financial year which runs from April to March. Please note that the tax rates may change from time to time.
This tax free allowance obviously affects everyone but the upper limit will only become relevant for children with a relatively high income through savings or otherwise. However, there are other tax implications on saving for your child that kick in with a much lower amount.
Tax on money given to children by their parents
If a parent or step parent puts money into a child’s savings account the child can only earn up to £100 interest in a year on that money before they get taxed on it. This rule takes precedent over the one just mentioned as it specifically targets money given to children by their parents regardless of their overall income. Interest over £100 generated by a child’s savings that’s come from money given to them by each parent will be taxed at the parents’ tax rate. The amount tracked for earning over £100 is also a cumulative one so it applies to all the money you’ve given them in previous years not just the last 12 months.
To follow the example above, £2,000 given to a child by a parent earning 5% per annum interest in a savings account generates the cut off amount of income (£100) allowed before tax would have to be paid at the parents’ tax rate.
The good news is that this rule only applies to parents and step-parents not friends and other family. So if the child’s grandparents, uncles, aunties, etc gave them money and it was earning interest the £100 limit would not apply.
Making sure it’s tax free
To make sure that your child’s savings (within the above limits) are automatically paid tax free contact HMRC for Form R85 (
www.hmrc.gov.uk/forms/r85.pdf). Complete this form and give it to the bank or building society that you’ve opened your child’s account with. Once they have this they will exempt the interest on the savings from tax and you will avoid having to claim the tax back.