Tax on Children’s Savings: Keep their money out of the taxman’s reach

Did you know that you can pay tax on Children’s savings? You could be taxed on interest earned by money that you’ve placed in your kids saving account – which is something you want to avoid!

We’ve prepared a guide on how to make your kids saving account as tax efficient as possible, mitigating the potential tax payments and saving the right way.

Do children pay tax?

Children have the same income tax allowance as adults – £12,570 in the 2023/24 tax year.

While it’s unlikely many children 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 a kids savings 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 children’s savings gifted by parents

As a parent you also need to be aware that if your child earns more than £100 interest on the 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.

At the current interest rates, some of the top kids saving accounts offer interest rates of over 5%. This means that there only needs to be £2,000 in their account to earn £100 interest a year, which will cause a tax on the children’s savings.

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 ISA 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 the age of 18.

Tax efficient investment options

If your child has a Child Trust Fund, you could top this up, up to the current annual limit of £9,000 for the 2023/2024 tax year. If they don’t you can take out a Junior ISA for an under-18-year-old. These also allow you to pay in up to the 2023/2024 allowance of £9,000 in stocks and shares and/or cash.

Or you can take out a children’s Tax Exempt Savings Plan. These are long-term saving plans offered by friendly societies, such as Foresters Friendly Society, that allow you to save £25 a month for anything from 10 to 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 children’s 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’s 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 taxes 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.

Open a kids saving account

You can open a Children’s Tax Exempt Plan  which offers an affordable way to save a tax-free cash sum for your child’s future.

Alternatively, as long as you’re the child’s parent or guardian, you could open a Junior ISA  to place some solid building blocks to help your little ones grow and flourish as they grow older. This allows them to have a savings pot they can access when they turn 18!

Contributions paid into a Foresters Friendly Junior ISA or Children’s Tax Exempt Plan are invested in funds which includes stocks and shares, the value of the plan may fall as well as rise and your child may get back less than you have paid in. Tax rules may change and depend on individual circumstances.

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.

We do not offer financial advice. If you’re unsure as to the suitability of a product you should seek advice from a Financial Adviser. You may have to pay for this advice.

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