Keep your children’s money out of the taxman's reach
Wednesday, September 30, 2015
Did you know that you could be taxed on interest earned by money that you've given your children? Here's how to mitigate this and also how to make your children's savings (and earnings) as tax efficient as possible
First things first: tax allowance
Children have exactly the same income tax allowance as adults - £10,600 in the 2015/16 tax year. While few will earn this much over the course of the year, they could still find themselves paying tax often unnecessarily on savings, investments and earnings as follows:
Tax on savings
Although children can receive interest on bank and building society savings accounts tax-free, it's usually taxed before it's added to an account.
What you can do: You just need to complete a form - R85 - to register a child's interest as tax free. You can get this from their bank or building society or download it from HMRC.
If your child has an account and you haven't already done this, don't worry, you can claim the tax back. You'll need another HMRC form - this time it's an R40.
Tax on savings given from parents
As a parent you also need to be aware that if your child earns more than £100 interest on money you've given them (or £200 if both parents have given money), the taxman will treat this interest as yours and tax it accordingly.
Although interest rates are low at the moment, they may go up. If they increased to 5%, a child only needs £2,000 in their account to earn £100 interest a year.
What you can do: If you plan to give your children money that's likely to earn this amount of interest, consider putting it into a tax-free savings plan instead.
Tax on investments
Although you need to be 16 years old to hold investments (children can open a Cash NISA at 16), there are a variety of investments that parents can hold on behalf of their children before they reach this age (after all, the earlier you start to save, the better).
What you can do: Invest in one of the many tax efficient investment plans available, which will potentially save money both before and after your child reaches 18.
Tax efficient investment options
If your child has a Child Trust Fund, you could top-this up, up to the £4,080 limit this tax year. If they don't you can take out a Junior ISA for an under-18 year old. These allow you to pay in up to £4,080 this tax year in stocks and shares and/or cash.
Or you can take out a Child Tax Exempt Savings Plan. These are long-term saving plans offered by friendly societies, such as Foresters Friendly Society, that allow you to save up to £25 a month for anything from 10-25 years. You can even arrange for them to pay-out on a special birthday, such as their 18th or 21st for example.
Both Junior ISAs and Child Tax Exempt Savings Plans offer several advantages:
- The cash sum paid out is tax free
- Any interest is paid free of tax
- There's no further tax to pay on dividends
- There's no capital gains tax to worry about on profits when they cash in the investment
- They are also great for parents as the £100 rule doesn't apply - so you could use these to put money away for your child's future without having to worry about being taxed on the interest.
- Plus, a Child Tax Exempt Savings Plan can be held alongside a Child Trust Fund or Junior ISA.
Tax on earnings
While it's unlikely any part-time work on its own is going to take your child's earnings beyond their tax free allowance its good to be aware of how it could affect them should the need arise.
Without a tax record, an employer will just pop them onto an emergency tax code until the tax office has worked out the correct code, which means they could pay tax unnecessarily.
What you can do: If you've pushed for a correct tax code, this may get sorted out while they're employed, and their employer will be able to refund any overpaid tax through their pay.
But if it's not sorted before they leave a summer job, they'll need to claim it back from HM Revenue & Customs (HMRC) by completing a P50 form. To get one, contact HMRC or download it from their website. HMRC also has a useful calculator to help you work out if your children (or you!) have overpaid tax.
Please note: this blog is based on our understanding of current tax rules and is intended to provide information, not financial advice, to help you make an informed decision about tax-efficient savings and investments.
Please note: that tax rules may change and depend on individual circumstances.
comments powered by