Tax warning for parents putting away savings for their children

As a new study revealed UK parents could be putting more savings away for their children than for the entire household, while being confused by the offerings on the market for under 18s, money expert Andy Webb warned of a little-known tax complication they also need to consider.

While he noted there is often no tax due on children’s accounts, the Be Clever With Your Cash expert cautioned that the interest earned might be subject to tax if the parents are the main people adding funds into the account. He explained to Ireland Live: “This can occur if your child starts earning over £100 in interest in money you have gifted them as it is counted as part of the parent’s personal savings allowance – not the child’s.”

Personal savings allowances currently sit at £1,000 for people on the basic rate tax band while those on the higher rate only have a £500 allowance on savings interest before it becomes liable for tax. After this allowance has been reached, interest is taxed at your usual rate of Income Tax.

The £100 interest limit on children’s savings accounts doesn’t apply to money gifted by grandparents, relatives or friends. Additionally, the limit doesn’t apply to Junior ISAs or a Child Trust Funds as these accounts are inherently tax-free. The new study, conducted by Smart Money People and its sister website Be Clever With Your Cash, on parents’ savings tactics for their children revealed UK parents have an average of over £4,000 stashed away for each of their children, with only £6,250 put away for themselves on average.

Overall, this could see families with multiple children having more in their kid’s savings than the households’ so it’s vital parents put just as much thought into considering accounts, rates and taxes for their children’s savings as they do for their own. A quarter of parents in the study admitted to being confused by the savings products on the market for their children. But to ease the uncertainty, Andy shared some of his top things to think about when looking for savings accounts for children.

Checking requirements and restrictions

Andy pointed out that many children’s savings accounts will have requirements around who can open the account for a child and the documentation to do so, which he advised checking beforehand.

Similarly, some accounts will restrict when the money can be withdrawn. Andy noted a few will allow easy access to help teach children money management while others will only allow access to the funds once the child reaches a certain age such as 18.

Some parents may perhaps be considering a Junior ISA, a type of long-term tax-free savings account for children.

Comparing interest rates and fees

Tied in with the potential tax implications on the interest, Andy urged parents to “look for accounts that offer competitive interest rates to maximise the growth of the savings as well as checking any fees”. He also advised potentially getting the children themselves involved in the research to teach them valuable finance terms and skills, depending how old they are.