When you’re trying to save money for your child’s future, it’s a good idea to start by choosing a straightforward and efficient savings strategy.

One of the best ways to make the most of a child’s savings is by finding plans that maximise the amount of money earned in interest and bonuses while minimising the amount paid in tax. Saving money on tax and keeping that value in a savings account is a great way to maximise savings for your children’s future.

However, many people are inexperienced when it comes to creating savings plans for their children and may find themselves asking a straightforward question: Are children's savings accounts tax-free?

In this article, we will be exploring some situations where tax may be payable on children’s savings accounts, as well as breaking down some popular types of accounts that can be used to minimise the amount lost to tax.

Sheffield Mutual are not tax experts. Whenever you’re preparing a savings strategy, it’s essential to understand whether tax will need to be paid on any interest or bonuses you earn. This blog is based upon our current understanding of tax legislation. Tax treatment depends on individual circumstances and may be subject to change in the future. If you have any questions regarding tax you should speak to a tax expert which may incur a fee.

Efficient Ways To Save For Children’s Futures

When it comes to paying tax on interest earned by children’s savings accounts, there are a few factors to consider.

In line with advice on the UK Government Website, if a child earns over £100 of interest on money gifted to them by their parent, this money should be declared to HMRC during the same tax year. If this value exceeds the parent’s personal allowance, tax will then be payable on the interest earned.

Additionally, if a child earns interest on savings from other sources, this interest will count toward their own Personal Savings Allowance of £12,570.

This means that, if a child earns enough interest to put their overall income above their Personal Savings Allowance, this will need to be declared to HMRC so that an appropriate amount of tax can be paid.

However, there are some savings strategies that can help mitigate any tax burden that might be owed on children’s savings.

Junior ISAs

A Junior ISA is a type of ISA that can be opened on behalf of a child. At Sheffield Mutual, we offer two different types of Junior ISA; our Investment Junior ISA and our Sustainable Junior ISA.

There are multiple advantages to opening this type of account. As long as the child is a resident of the UK (or a dependant of a crown servant living overseas), a JISA can be opened on their behalf by the person with parental responsibility (known as the ‘Registered Contact’).

After the account has been opened, any adult can then contribute. This means that a JISA is an excellent option for saving if you have family or friends who are interested in contributing to your child’s financial future.

However, the significant advantage of a JISA is its tax-free nature. Much like a standard ISA, JISAs are allocated an annual contribution limit, and any interest, bonuses, returns or dividends earned within the JISA are tax-free. 

Currently, the annual contribution limit on a JISA is £9,000. This means that parents, grandparents, aunts, uncles, godparents, and family friends can all contribute directly to a child’s account, as long as their total contributions remain lower than the £9,000 limit, and any profit or interest earned by this account is tax-free under current rules.

Because of the high contribution limit, wide availability, and the ability for any adult to contribute, a JISA is often considered one of the most popular and straightforward options for tax-free children’s savings.

If you are interested in opening an Investment Junior ISA for your child, please read the important information and key information documents carefully. Alternatively, if you are interested in opening a Sustainable Junior ISA, it is important to understand that the risk profile is slightly higher. Please review the Sustainable Junior ISA important information document and key information document for more information. Both of these products are classed as Stocks & Shares ISAs which means there is the potential you could get back less than you have paid in. 

Children’s Tax Exempt Savings Plan

If you have maximised your contributions to a Junior ISA, the next step to saving money for children in a tax-efficient manner may be to consider a Children’s Tax Exempt Savings Plan.

This plan allows members to choose an investment period of 10 to 25 years, as well as select between making monthly contributions (between £5 and £25 per month) or annual contributions (up to £270 per year).

When taking out a Children’s TESP, you will receive a ‘Sum Assured’ which is the guaranteed minimum amount you will receive upon the plan’s maturity. In addition to this minimum amount, this investment can also earn additional bonuses based in line with the performance of the fund, and the value of these bonuses will be calculated based on the Sum Assured you have been provided.

Due to the requirement for regular contributions, a Children's TESP may be a less attractive option than a JISA in certain circumstances.

Luckily, however, parents do not have to choose: a child can receive both a JISA and a TESP, maximising the amount of tax-free savings they can earn.

If you are considering opening a Children’s Tax Exempt Savings Plan, please read our important information documents and key information document before investing.

Please note: A Children’s Tax Exempt Savings Plan has a set investment period. If you surrender this plan before maturity, the child may receive less money back than you invested. 

Children’s Investment Bond

When discussing tax-efficient children’s savings, the Children’s Investment Bond differs slightly from the other options we have outlined.

With a Children’s Investment Bond, you are guaranteed to receive at a minimum the value of your investment plus 5%, as long as it remains invested for at least 5 years. In addition, this type of bond also has the potential to earn additional bonuses, dependent on market conditions, that would be calculated based on the Sum Assured.

However, the way tax applies to investment bonds is slightly different from that of JISAs or TESPs.

The money saved in an investment bond is invested in a fund on which Sheffield Mutual pays tax at a basic rate. This means that there is generally no tax to pay, unless the child is already a higher-rate taxpayer by the time the plan matures. In this case, the value would have to be declared to HMRC so the additional tax rate can be applied and any difference deducted.

Investing in a Children’s Investment Bond is also a one-off lump sum contribution, which means that regular contributions are not required. This makes them an attractive option if you have a lump sum to invest on behalf of a child, but are not sure whether you will be able to make regular contributions in the future.

However, because some circumstances require tax to be paid on this type of investment, it may not be the most attractive option if you are looking to minimise the tax burden. However, unless your child is a higher- or additional-rate taxpayer when the plan matures, there will generally be no extra tax to be paid.

If you are interested in taking out a Children’s Investment Bond, please read our important information documents and key information document carefully before committing to this investment strategy.

Please note: A Children’s Investment Bond is designed to last a minimum of 5 years. If you surrender before this point, penalties will apply and the child may receive less money out than you have invested. Any bonuses are not guaranteed and are subject to change. Capital is at risk. Tax treatment is dependent on individual circumstances and may be subject to change in the future.

Discover Tax-Efficient Children’s Savings At Sheffield Mutual

At Sheffield Mutual, we’re committed to helping our members discover the best savings strategy for themselves and their families.

Browse our range of savings options to discover straightforward, efficient savings strategies that can help you make the most of your money, whatever your financial goals may be.

If you are interested in becoming a member of Sheffield Mutual or have questions about our products, please feel free to contact us online or by calling 01226 741 000. One of our helpful and friendly team members will be happy to assist you with any questions you may have.

Tax treatment depends on individual treatment and is subject to change. Sheffield Mutual are not tax experts. If you have questions regarding your tax treatment, you should speak to a tax expert, which may incur a charge.

This article provides generic information and opinions of the writer and should not be relied upon for making investment decisions. No advice has been provided by Sheffield Mutual. If you are in doubt as to whether a savings or investment plan is suitable for you, you should consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.