Children's savings, tax and tax years


Everyone wishes to give their kids the best start in life and there are many ways to save for them, from bank accounts to Government savings vehicles like the recently launched Junior ISA.

You can put away as much money as you wish for your children but there are tax implications. Like all things financial the options, limits and implications can be confusing.

Children have a tax limit as adults do. So for the tax year 2011/12 a child has a limit of £7,475, the same as adults under the age of 65.

When saving into a bank account for a child, you should ensure that they are paid tax free by completing an HMRC Form R85, which you can obtain from the Inland Revenue website. Simply download the form and pass it to the bank / building society that the child's account is held with. This will avoid you having to claim any tax back.

As long as the child does not "earn" more than their own tax limit, in any given tax year, then they wouldn't pay tax.

If a parent saves money into a child’s account that child can only earn up to £100 interest in a year on that money before they get taxed on it.

With Government initiatives like the Junior ISA, the Government sets annual limits and the accounts are tax efficient, so automatically not liable to tax, without need to complete an R85.

The Junior ISA is designed for adults to save on behalf of their children. The child has a limit of £3,600 2011/12 tax year. For clarity, a tax year runs from 6th April to 5th April.

Junior ISAs allow parents, family and friends to save and invest for the child's future. But be aware, that the proceeds of the account are held in the child's name. Only the child can access the money, when they become an adult.

The Junior ISAs aim is to provide a tax-efficient lump sum at the start of adult life. The parents cannot withdraw money in the child’s account as it is designed for the child's future.

Junior ISA providers allow you to start a Junior ISA with a low monthly premium, some as low as £10 a month.

Parents, family and friends can also contribute as long as the total combined amount invested in each tax year doesn’t exceed £3,600. This limit is likely to increase with inflation each year. The first inflation increase is scheduled for April 2013.

Lilly Thompson writes on a number of subjects including Junior ISAs and Children's Savings.