Despite the title, this article has nothing to do with saving up enough money to have children - you’d never have enough! No, this is about the various ways you can save for your children once they are here, and the tax advantages and pitfalls of the various options.
But children don’t pay tax, do they?
Actually, children are just counted as people, they are not exempt from tax just because they happen to be small. However, as every individual resident in the UK gets a personal allowance, currently £7,475 per annum, and as most children don’t have a job, they can earn quite considerable interest on savings/investments without having to pay tax. Children can also realise capital gains of up to £10,800 (the current annual exempt amount) before paying capital gains tax. Bank interest is normally paid net of 20% tax deducted at source, but those under 16 can apply to have their bank interest paid gross, using a form R85. Note that if your children have accounts and you have not completed this form, the bank will deduct tax, and you will need to go through the rigmarole of claiming it back from HMRC at a later date.
However, there is always a catch, and where parents have provided their children with the investment generating an income, e.g. if you put £100,000 in the bank for your children, then, once the interest exceeds £100 in a year, it is the parents who are liable to pay tax on the interest, not the children. Otherwise everyone would simply put all their savings in their children’s names...
OK then, what tax-efficient savings vehicles are there for children?
Tax-efficient savings vehicles for children will automatically be non-taxable in their entirety (i.e. even if personal allowance/annual exemption limits were breached) and will protect their investment from the compound impact of tax within the investment vehicle itself (e.g. a shares product selling shares and realising capital gains).
If you already have children, born between 1 September 2002 and 2 January 2011, you would have been lucky enough to have been awarded a Child Trust Fund (CTF), into which the Government invested up to £250 (or even £500 in certain circumstances) when your child was born. Parents, grandparents or anyone who has a mind to can also invest up to £1,200 a year into this account, which grows tax free. The child can withdraw the money in their CTF account from their 18th birthday and there is no tax on withdrawal.
New babies will not get a CTF account, but those already in existence will run until their natural end. Originally there was to be a further £250 payment at age 7, but this is no longer the case. From the autumn, parents who would have liked to invest in a CTF for their child might like to consider a Junior ISA instead.
The full details of Junior ISAs are not yet available, but it is likely they will be run by the same providers who offered CTFs. The plans are to allow people to invest up to £3,000 per annum on behalf of any child who does not have a CTF, into either a shares or cash Junior ISA, or part into one of each. The child will not be able to withdraw any money until the Junior ISA becomes a normal ISA at age 18.
Are there any other products?
Most lenders will offer specific children’s accounts and some may offer really good rates if you commit to a regular investment (for example), so look around before committing your cash. The Halifax are consistently leaders on the High Street, currently offering a whopping 6%pa.
National Savings also offer children’s bonds with a five year term, but at only 2.50% including a five-year bonus, these may not be the most attractive available.
Finally, you could consider investing in a stakeholder pension for your child. Every individual can invest up to £3,600 a year without any earnings, and you get basic rate tax relief immediately, so you only have to fork out £2,880 to get this amount in a pension plan. And starting them young means that they have a better chance of getting a decent sized pension when they do come to retire.
However, if you baulked at the five-year national savings term, remember, this is a pension, and as such your child won’t be able to get at the money until retirement age, which is currently a minimum of 55. Although you may think that is a good thing!