Tax-efficient savings for children

There are a number of ways to save or invest for children – some accounts are tax-efficient but rigid, others are often flexible but liable to tax. Interest earned from CTFs and Junior ISAs is paid tax-free, but the money is effectively locked in until the child is 18, at which time it belongs to the child. Standard savings accounts usually offer lower interest rates and the interest is likely to be taxable, but there will be flexibility on withdrawals and transfers, enabling the parent to keep a tight rein on the money.

Junior ISAs operate in much the same way as ordinary ‘adult’ ISAs. The maximum investment limit for 2015/16 is £4,080, so there is a real opportunity for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. Until April 2015 it was only possible for children who did not hold child trust funds (CTFs) to invest in Junior ISAs, which meant that many young savers were trapped in accounts yielding poor interest rates. From April 2015 all children (under-18s) who are UK resident should be able to hold a Junior ISA and transfers from CTF accounts to Junior ISAs will be allowed. This change is important as it allows parents to look for a better return on their investment, pay lower charges and have more choice of products.

Whether a CTF should be transferred to a Junior ISA greatly depends on whether the child currently pays tax, and whether they will save enough to pay tax on their savings when they’re 18. If it is likely that the child will save more than £15,240 (the annual ISA limit from 6 April 2015) in their first 18 years, then it is probably worth considering a Junior ISA, as these convert to full cash ISAs when the child turns 18.

Just like adults, children are also entitled to an annual personal allowance (£10,600 for 2015/16). Although Junior ISAs (and CTFs) are tax-free, unless the child stands to earn interest of more than £10,600 from other types of investment accounts, he or she should not pay tax on the interest earned in any case. Therefore, for those with modest savings, one of the most important considerations when choosing a savings plan should be the interest rate on offer and potential return on the investment.

Leave a Reply

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

News / Blog

14th
August

Rise in the national living wage is disproportionately affecting small businesses claims FSB

Is your small business struggling to cope with financial pressures? Is your SME being squeezed by commodity price inflation, rising…

7th
August

SMEs struggling to cope with higher business rates and levels of bad debts

How tough are small businesses findings things at the moment? Well, a new survey by Bibby Financial Services of 1,000…

31st
July

Bacs research shows late payments are costing SMEs over £2 billion a year

If you run a small business, you’ll probably already be painfully aware of the threat that late payments can pose…

31st
July

Paying voluntary NICs

There are various reasons as to why gaps may arise in an individual’s national insurance contributions (NIC) record, for example,…