Savings accounts for children
One of our first experiences of saving is a cash deposit account. From birth, our children receive gifts of money, whether pocket money, birthday or Christmas gifts. In some cases, money is left to children in a relative’s will.
Finding the best home for that money is now a bit more complicated than in days gone by.
As children usually have no other income, they can use their full personal allowance of £11,000 to receive bank deposit interest and other taxable income without paying tax.
What’s ‘the Starting Rate for Savings’?
In addition to the personal allowance, the Starting Rate for Savings is available to those whose non-savings income and savings income added together is less than their personal allowance plus £5,000.
- This can add an extra allowance of up to £5,000 to cover savings income, but...
- The allowance is reduced where non-savings income (earnings, pension income, dividend income) are more than your personal allowance.
Finally, there’s a £1,000 Personal Savings Allowance, which allows basic rate taxpayers to earn £1,000 in bank interest tax-free.
The Personal Savings Allowance is available in addition to the Starting Rate for Savings, for those who qualify.
Overall, this means that anyone, including children, with no income can receive savings income of up to £17,000 without paying tax.
Cash savers who pay no tax can therefore choose whether to save in an ISA or a normal bank account.
The February issue of Thinking Ahead looked at the pros and cons of these options for adults. The same principles apply to children, who can choose to save in a normal bank account or a junior ISA.
What about junior ISAs?
Junior ISAs allow up to £4,080 a year to be sheltered tax-free. There are two types of junior ISA:
- A cash junior ISA
- A stocks and shares junior ISA
A child is allowed just one of each type in any particular tax-year.
The most important difference from an ordinary bank account or investment is that any money in a junior ISA is locked away until age 18, when it becomes the child’s money. It can also be converted into a normal ISA at that time.
This inflexibility could be seen as either a good thing, as it imposes the discipline that the money can’t be accessed, or a bad thing because of lack of access.
A junior ISA can only be opened on the child’s behalf by their parents or guardian(s). Remember, investing in a stocks and shares junior ISA means the value of the ISA could go down as well as up and the child may not get back the amount paid in.
Cash savings: junior ISA or ordinary bank deposit account?
Given that the interest from an ordinary bank deposit account will probably be tax-free (unless your child has a lot of taxable income) the most important considerations in making this choice are:
- The rate of interest
- How important early access is
- Who gifts money to the child
The highest-paying junior ISAs offer around 3% interest at the moment. This looks attractive, given that the Bank of England Base Rate is only 0.25%. But remember, banks and building societies can afford to give good rates on junior ISAs, as savings are usually locked away for a long time – particularly in the case of young children.
Ordinary children’s savings accounts pay a bit less – current rates are between 2% and 3%, but have the advantage that savings can be accessed early. You need to watch out for accounts that apply interest rate penalties if you make withdrawals.
If parents have gifted the money in an ordinary deposit account, the interest (above £100 a year) will be taxed as the parents’ income.
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