1. Children’s savings accounts
A bank or building society account is a great way to save for your children’s future and teach them the value of a pound. You can set up a savings account for your child for as little as £1 and build up a substantial pot that they can access when they’re a little older (typically 15, 16 or 18).
However, before opening an account for your little one, it’s worth thinking about the tax implications. While there’s usually no tax to pay on children’s accounts – largely because they don’t have any earned income, so rarely exceed their allowances – as a parent, you could still get stuck with a tax bill.
If your child earns more than £100 of interest on any monies or assets you give them (£200 if both parents contribute), HMRC will view this interest as yours and tax you accordingly. So if you’re planning to deposit a large sum of money, a standard savings account may not be the most sensible choice.
2. Junior ISAs
If you’re looking for a more tax-efficient option, you may be better off putting your money into a Junior Individual Savings Account (ISA). You can save or invest up to £9,000 in the current tax year and open one cash Junior ISA and one stocks and shares Junior ISA per child. Here are a few things to consider before you part with your money:
Cash Junior ISAs work much the same as a standard savings account, except that any interest you generate is completely tax-free.
A stocks and shares Junior ISA enables you to buy shares, bonds and other eligible investments on behalf of your child without incurring any Capital Gains or Income tax.
While you can only pay £9,000 into your Junior ISA, you have the flexibility to transfer between different providers over the term of your investment.
Junior ISAs are a sound, tax-free way to save for your child’s future, but it’s worth remembering that once your son or daughter turns 18, the cash automatically transfers to them. That’s a lot of money and a lot of responsibility for someone so young, so it may not be the ideal investment for everyone.
3. Children’s pensions
When you’re thinking about putting some money away for your children, paying into a pension pot may not be the first thing that springs to mind. However, setting up a pension for your child is a simple, tax-efficient way to secure their financial well-being and provide a nest egg for them to enjoy later in life. Here are a few points to consider if you’re thinking about saving for your child’s retirement.
Only a parent or legal guardian can set up a pension for their child, but anyone can contribute, including grandparents, godparents and family friends.
You’ll look after your child’s pension until they turn 18, at which point, control will pass to them.
You can save as much as £2,880 each year, tax-free, and just as with your own pension, the government will automatically top up any contribution by up to £720 (which is tax relief of 20% on your gross contribution).
Any growth generated by the pension will be exempt from Income Tax and Capital Gains Tax.
It may seem odd to start a pension for someone so young, but because your child is so far from retirement, even small contributions will have time to grow. Plus, unlike a Junior ISA, the money will be tied up until they’re 55 years old, so you won’t have to worry about them splurging it all on their eighteenth birthday.
4. Buying Premium Bonds for your children
Unlike other savings or investments, where you earn interest or dividends, with Premium Bonds, you’re entered into a monthly prize draw, with the chance to win up to £1 million tax-free. This may seem like a risky proposition, but in reality, Premium Bonds are one of the safest investments out there – perfect for those seeking a conservative savings option for their children. Here are a couple of things to keep in mind when purchasing Premium Bonds:
There’s a minimum investment of £25 and a maximum holding level of £50,000.
As the named parent or guardian, you’ll be responsible for managing and cashing in the bonds until your child turns 16.
You can win between £25 and £1 million tax-free, each month.
Premium Bonds are backed by HM Treasury, so you have the peace of mind that all the money you invest is 100% secure.
Ask the experts
These are just some of the savings opportunities available for you and your children. For more advice and information about saving for your child’s future, or any other major investments, please don’t hesitate to get in touch. Our team of accountancy experts are on hand and happy to help. Note that Wisteria can provide advice about the tax efficiency of investments, but are not financial advisers.