Many people assume that children are exempt from tax, but that isn’t actually correct. They are actually liable for income tax in the same way that adults are. However, most children don’t earn income above their personal tax allowance of £12,500.
Children qualify for a £5,000 starting rate if they don’t have any other source of income, meaning they could potentially earn up to £17,500 before paying tax.
Even for children who do have money coming in, the personal savings allowance means they can usually earn interest of up to £1,000 a year completely tax-free.
It is therefore highly unlikely that your children would ever have to pay tax on their savings. But unless you’re saving into a tax-free ISA, you (as a parent or guardian) may become liable.
If your child earns more than £100 a year in interest as a result of your contributions, it is effectively classed as your income, and added to your tax bill. The limit can be doubled to £200 if both parents combine allowances though, and no tax will be payable if it’s within your own Personal Savings Allowance.
Remember, this rule doesn’t affect ISA contributions. Regardless of how much interest is received on a Junior ISA, it stays tax-free both for your children and for you.
Parents can save up to £9,000 into a Junior ISA (JISA), per year per child and pay no capital gains tax or income tax on the investment. The JISA can be incorporated into our investment management services to be managed with other family accounts. Although, it is important to remember that once invested this money belongs to the child, so you may not agree how they spend it once they reach 18 years of age.
Grandparents can also gift £3,000 per year under the annual ‘gift allowance’ and potentially more if the grandparent survives seven years after gifting.
However, you want to contribute financially towards a child’s future, speak to your Investment Manager about how to structure the most appropriate portfolio to meet your required investment goals for the future.
The value of the child’s investments and income arising from them can fall as well as rise in value and the child may lose some or all of the amount invested. EFG Harris Allday does not provide tax advice.