Introducing early saving with a JISA

Just like adults, children can make use of their personal tax allowance for savings. But should you choose a Junior ISA (JISA) over an ordinary savings account?

Previously, we covered ISA allowances for this tax year and next. We also explained why it might be better to hold cash in ordinary savings accounts and fixed-term deposits, rather than in their ISA equivalents.

Put simply, for most basic and higher rate tax payers, your personal savings allowance (more of which later) will ensure that you receive interest tax-free, just like an ISA. The rates on ordinary savings accounts and fixed-term deposits are also better.

Not using your ISA allowance for cash savings leaves it available to use for stocks-and-shares investments.

Although the main ISA allowance is unchanged for 2019/20, junior ISA allowances are set to rise from £4,260 this tax year to £4,368 on 6th April 2019.

Junior ISAs have limited use, as children can make use of their own personal tax allowance – currently £11,850 a year rising to £12,500 from 6th April 2019.

If their income, including interest from cash deposits and dividends from shareholdings, falls within their personal allowance, they won’t normally pay any income tax.

Therefore, just like adults using their personal allowance or personal savings allowance, children can also earn tax-free interest on ordinary savings accounts.

If the rate of interest on the ordinary savings account is better than the JISA, that may be a better bet.

Do JISAs have any advantages?

There are three main reasons for choosing a JISA rather than an ordinary savings account:

  1. Any money gifted by parents is only allowed to earn interest of £100 a year tax-free, with any excess taxed at the parents’ tax rate. If the child’s money has been gifted by parents, then a JISA allows all interest to be received tax free, even if the interest is more than £100 and the money came from parents. If the child’s money has come from other sources, such as grandparents, then the money is regarded as the child’s, and they can earn tax-free interest using their own tax allowances.
  2. JISAs are locked away to age 18, when they are converted to ordinary adult ISAs. This removes temptation to access the money early, but also means it can’t be used in emergencies (like the cost of funding a school trip).
  3. If the rate of interest on a JISA is better than an ordinary savings account, then the JISA may be the better bet. However, there is a risk that you are enticed by a good ‘teaser’ rate to invest in the JISA, but the money is then locked away for several years during which the rate received is paltry.