Building up children’s savings is one of the best gifts you can give them. Having some funds for their time at university, buying their first house or other big purchases such as their first car, can help get their adult lives off to healthy start financially.
Children, like adults have a Personal Allowance for Income tax – £12570 for 21/22. Legally you can give your children any amount of money, but these gifts could incur tax. If these gifts earn your children over £100 a year in interest, dividends or other income – they would have to pay tax on it. This does not apply to Junior ISAs, or money received from anyone else such as friends or grandparents.
What are the best options for children’s savings?
Children’s savings accounts
Children can have a bank account if their parent or guardian sets this up. From the age of seven they can even start managing their own accounts.
Children’s savings accounts can be set up with as little as a £1 deposit, and some include a gift or incentive for opening. Usually there are two types, instant access accounts and regular savings accounts. Regular savings accounts encourage a regular deposit of a set amount and tend to pay higher interest rates. However, there are often penalties if you withdraw money within a set time period, such as losing the interest accrued within that period.
Instant access accounts pay less interest but have the advantage that you or your child can withdraw or deposit money at any time.
Junior ISAs can be an attractive option because your child will pay no tax on the interest that they earn. A parent or guardian has to open the account, and usually the child can only withdraw the money once they turn 18.
Children can have one Junior ISA and one Junior stocks and shares ISA. The Junior ISA savings limit is currently £9000 per annum.
Junior ISAs work the same way as a regular savings account, except that the interest is tax free, and the child cannot access the money until 18.
Junior stocks and shares ISAs allow the parent or guardian to invest savings in shares, bonds or other eligible savings products, however it is worth noting that the value of these, as with all investments, can go down as well as up, and the maximum that can be saved between both ISA products is £9000 per year.
Premium bonds are different to other savings or investments because rather than earning interest, each bond is entered into a monthly prize draw where you can win a tax-free prize of between £25 and £1million.
You must be over 16 to buy premium bonds, and can buy them on behalf of your child. The minimum investment is £25 and the maximum amount you can invest is £50,000.
Around 30% of people with a £1000 investment will win a prize each year. The money is all backed by HM Treasury so the investment is entirely secure.
Premium Bonds are good if you like the idea of winning tax-free prizes, and with interest rates low can be an attractive option. However, taking into account inflation, your savings could effectively be worth less in the future as they will never earn any interest.
If you are keen to start putting away some money for your child’s future, and would like some advice on how to maximise your investment and minimise any tax liability our financial advisors would be happy to help.
Get in touch here.