Posted in: Finance Last updated: 06 Apr 2016

Children's savings

We all want to give our kids the best possible start in life. By starting early and putting aside money for when they’re grown up you can help them realise their ambitions whether its help towards university fees, deposit for a first flat or a first car.

children's savings guide
children's savings guide

Opening a savings account

Opening a savings account for your child is easy and there are lots of banks and building societies out there offering accounts that are specifically aimed at children. In most cases a child can't have the account in their own name until the age of seven. Until this time a parent or guardian has to be the signatory. Different providers have different age limits and features so make sure that you check any limits and restrictions before opening an account.

There are also Government initiatives such as the Junior ISA and the Child Trust Fund, which fall in to the category of children's savings, but allow contributions up to £4,080 in the current tax year (2016/2017 tax year).

Your child's tax
free allowance

Most people don’t realise that children have the same personal tax allowance as adults under the age of 65, £11,000 a year, for the tax year 2016/2017. The difference is that most adults use up their tax allowance with the first £11,000 of their income. For children this is obviously rarely the case, so as long as their "annual income" is less than this threshold then they wouldn't pay tax. For example: £200,000 in a savings account earning 5% per annum interest provides £10,000 income which is below the child's tax threshold.

Tax on money given to children
by their parents or relatives

A different rule applies however if a parent or step parent puts money into a child's savings account. In this case, the child can only earn up to £100 interest in a year on that money before they get taxed on it. This rule takes precedence over the one just mentioned as it specifically targets money given to children by their parents regardless of the child’s overall income. Interest over £100 generated by a child's savings that comes from money given to them by each parent will be taxed at the parents' tax rate.

To follow the example above, £2,000 given to a child by a parent earning 5% per annum interest in a savings account generates the cut off amount of income (£100) allowed before tax would have to be paid at the parents' tax rate. The good news is that this rule only applies to parents and step parents, not friends and other family members. So if the child's grandparents, uncles, aunties, gave them money and it was earning interest the £100 limit would not apply.

children's savings guide

Making sure it's tax free

To make sure that your child's savings (within the above limits) are automatically paid tax free contact HMRC for Form R85. Complete this form and give it to the bank or building society that you've opened your child's account with. Once they have this they will exempt the interest on the savings from tax and you will avoid having to claim the tax back.

It’s useful to know that completing a form R85 isn’t necessary for either Child Trust Funds or Junior ISAs as they automatically come under the CTF and JISA tax rules without the need for any additional tax forms.

Note: Whilst we take care to ensure Hub content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions.

Interested in saving for your family's future?

We're an award-winning children's savings and investments provider*. 

We offer a selection of simple, affordable ways to invest for your child's future.

All of these products invest in stocks and shares so we want to remind you that their value can fall as well as rise, meaning your child could get back less that was paid in.

*We won the Moneyfacts award for Best Junior ISA Provider 2015. And as Family Investments we won the same award in 2012 and 2014.