Set your child on a tax-free path in life

Raising a child has never been cheap. Every year, this becomes painfully apparent to parents as their offspring draw up expensive Christmas wish-lists.

Raising a child has never been cheap. Every year, this becomes painfully apparent to parents as their offspring draw up expensive Christmas wish-lists.

New figures suggest the total cost of raising a child from birth to the age of 21 in a typical two-parent working household is now a staggering £153,620 - more than the cost of the average UK house.

The research, from the insurer Liverpool Victoria, reveals an increase of 9.4 per cent on last year's figures. Children now typically cost parents £7,315 a year, £610 a month, or £20 a day for the first 21 years of their lives.

Thankfully, for families with children born on or after 1 September 2002, a little extra financial help is at hand.

Under the child trust fund scheme, which goes live next April, the Government will pay each child a £250 voucher (£500 for those in low-income families) that will, when invested, grow into a tax-free lump sum available to them at the age of 18.

Letters from the Inland Revenue should now be dropping through letterboxes explaining what to do with the voucher and how to choose a savings fund in which to invest it.

Crucially, the scheme also allows parents, family and friends to put a total of £1,200 a year into the fund tax-free. It is hoped this carrot will encourage long-term saving, even if not every parent planning for their child's future can afford to exploit the tax break to the full.

Whatever you can manage to put by, avoiding tax should be a priority - and a mini cash individual savings account (ISA) is the best place to start when saving for the future.

You can put up to £3,000 a year tax-free in a mini cash ISA, although there are plans to slash this limit to £1,000 a year from April 2006.

Abbey's postal ISA currently offers one of the most competitive deals on the market, paying 5.35 per cent gross on balances of £1. Other deals worth considering include Halifax's ISA Saver Direct, paying 5.15 per cent, which can also be opened with a balance of just £1.

Yorkshire Building Society is offering an e-ISA paying a rate of 5.2 per cent. You will need at least £10 to open an account, and can only access this deal online.

None of the three ISAs outlined above levies a penalty for cash withdrawals.

If you don't mind tying your cash up, Lambeth Building Society's high-interest postal cash ISA pays 5.65 per cent, although this includes a six-month bonus of half a percentage point. Early access without notice incurs a loss of 45 days' interest.