Junior ISAs and Tax Exempt Savings Plans for children: how do they compare?
Tax-exempt savings plans are another way to save on behalf of a child, without paying tax no matter how much the money grows.
Like junior ISAs, they’re designed for long-term saving but there are a few key differences that might help you choose between the two.
What is a junior ISA?
Junior ISAs are tax-free savings or investment accounts for children, where the money is locked-in for the child until they turn 18. They have to be opened by the parent or legal guardian of the child but anyone can pay in.
Your child can have a cash junior ISA, a stocks and shares junior ISA, or both. You can put up to £9,000 each tax year into junior ISAs in a child’s name.
What is a Tax Exempt Savings Plan for children?
Tax Exempt Savings Plans (TESPs) for children are tax-free investment accounts designed to help you save for a child’s future.
TESPs, for both adults and children, are only available through mutual societies like OneFamily. Anyone can open a TESP for a child, you don’t need to be their legal guardian.
With a TESP, you choose how long the money stays invested (from 10 to 25 years) so you can decide how old the child needs to be before they get the money. You pay in a set amount regularly and can choose to pay either monthly (between £15 and £25 a month) or yearly (between £165 and £270 a year).
How junior ISAs compare to Tax Exempt Savings Plans for children
Here’s how the junior ISA and tax-exempt savings plans compare:
| Junior ISAs | Tax Exempt Savings Plans for children | |
|---|---|---|
| Who can open one? | Only a parent or legal guardian | Anyone |
| Who can it be opened for? | Any child 16 or under (15 for a OneFamily Junior ISA) who doesn't already have a child trust fund | Any child 15 or under |
| Who can access the money and when? | Only the child and only when they turn 18 | Only the child, at the end of your chosen payment plan |
| Who can pay in? | Anyone | The person who opened the TESP |
| How much can you pay in? | Up to £9,000 a year | Between £15 and £25 a month, or between £165 and £270 a year |
| How often do you have to pay in? | You can set up a direct debit, but you can pay in anytime you’d like | Every month or every year, depending on your chosen payment plan |
| Is there any tax due on the proceeds? | No | No |
| How does the money grow? | Cash junior ISAs grow by building interest
Stocks and shares junior ISAs grow by being invested in the stock market |
By being invested in the stock market and other assets |
Why do people choose a children's TESP over a junior ISA?
You don’t have to be a parent to open a TESP
Only a parent or legal guardian can open a junior ISA in a child’s name, while anyone over the age of 18 can open a TESP for a child, even if that child already has a junior ISA.
This means that their grandparent, aunt or uncle or even a family friend can give the child a gift that is specifically from them.
It doesn’t matter if they already have a child trust fund (or junior ISA)
If a child already has a child trust fund in their name, you can’t open a junior ISA for them (although you can transfer a child trust fund into a junior ISA).
However, you can open a TESP even if the child has a child trust fund or even a junior ISA. The only thing that would stop you from opening one for them is if they already have the maximum amount being paid into TESPs in their name (£25 a month or £270 a year).
You get to choose how old the child is when they get the money
With a junior ISA, the child will automatically get access to the money when they turn 18 and you can’t change this.
However, if you feel that 18 is too young for them to access it, with a TESP you have the option to choose a later date. You could time the TESP to mature on their 21st or even 25th birthday, or time it for when they’re likely to finish higher education, if they choose to go.
Only the person who opened the TESP can pay in
Because you’re the only person who can pay money into the TESP, that cash gift will come specifically from you and you won’t need to share the credit!
With junior ISAs, anyone can pay in so the final amount will likely have come from several different people.
It’s a long-term commitment
You can pay up to £9,000 into junior ISAs each tax year (tax year runs April-April), you can pay in anytime you like as long as you don’t go over this limit.
With TESPs, you’re limited to paying in no more than £25 a month or £270 a year. But rather than putting money in only on birthdays or Christmas, you’re committing to always making this payment.
If you don’t keep making the payments, the money in the account will be taxed, which is a good incentive to keep going!
You have to set up a direct debit when you open the account and if you do miss any payments, you’ll have 13 months to make those payments with a lump sum.
The money is invested in the stock market
Arguably, you don’t have to open a TESP if you want to invest the money you’re saving for a child, as stocks and shares junior ISAs also invest in funds.
But, as all TESPs are investment products, it’s one less decision to make when opening an account! You’re also guaranteed a minimum amount that the child will receive at the end of the payment term.
The money you pay into a TESP is invested in a fund, which buys shares in a variety of different assets. The kind of funds you can choose from will depend on your child’s TESP provider, but you might fin that the risk rating is lower than it is for junior ISA funds. Our TESP for children, the OneFamily Junior Bond, has two fund options to choose from.
If you’re weighing up whether investing the money in the stock market is the right option for you, find out what the differences are between investing and growing money through interest in our earlier article.
Am I best opening a children’s tax exempt savings plan or a junior ISA?
If you’re a parent or legal guardian and you’re happy for your child to access their money at 18, a junior ISA might be a good fit. The main advantage of a junior ISA over a Tax Exempt Savings Plan for children is you can pay more in - up £9,000 each tax year - and you’re not tied to a fixed payment plan.
But whether you’re the child’s parent or not, you could put money aside for them in a Tax Exempt Savings Plan instead, or as well as, paying into a junior ISA (if they have one).
As you choose how long you want to pay in for, you decide when the child receives their money, although you could choose 18, as long as this is at least 10 years away.
It’s worth noting that you don’t actually have to choose at all, as a child can have both a junior ISA and a Tax Exempt Savings Plan in their name.
Junior ISA
With our stocks and shares Junior ISA you can start investing from just £10 per month up to a maximum of £9,000 each year on behalf of a child. Anyone can pay in, and the child will gain access to the account once they are 18 years old.
Junior Bond
Our Junior Bond is a Tax-Exempt Savings Plan designed to help you save on behalf of a child for ten to 25 years. You can open one for any child under the age of 16 and when the policy matures the child will receive a tax-free lump sum.
Our Junior ISA and Junior Bond invest in stocks and shares. This means they have good long-term growth potential, but the value of your investments could go down as well as up so your child could end up with less money than you've put in.
More on children's savings
You may also be interested in:
Children’s Savings Guide
Making good financial decisions now can lead to a wonderful gift for their future
Children’s Savings Hub
Our Children’s Savings Hub shows you how to open doors for the young people in your life.
Junior ISA pros and cons
We’ve pulled together a list of the benefits of Junior ISAs and the things to keep in mind, so you know what to expect if you open one.
Junior ISAs vs child savings accounts
Junior ISAs and child savings accounts both help you save for your child’s future, but they’re very different products and suit different needs.