Tax-Free Saving for Children

It is often possible to find accounts at banks or building societies which are designed to help children save money. Often these accounts are subject to a minimum age limit, usually seven years old. The child will need to be accompanied by a parent or guardian in order to open the account. Usually parents and other family members are able to contribute to the account, and the money saved will earn interest at generous rates.

Children have their own annual personal income allowance, that is, the money they are allowed to earn before being required to pay tax. For the tax year 2008/2009, the children's personal allowance is £5,435 (this is the current personal allowance for all people under the age of sixty-five). If the interest they earn on their savings does not exceed this limit, they will not be required to pay tax on this interest. However, if the money in their savings account has been invested by their parents or step parents and it earns more than one hundred pounds interest over the tax year, this interest will be taxed at the relevant parent or step parent's usual income tax rate. Any money invested by grandparents or other adults will not be subject to this tax rule. Contributions made less than seven years before the giver dies may be subject to inheritance tax.

There are saving schemes available that make it possible to save for children tax-free. These include Child Trust Funds and Children's Bonus Bonds. These saving options enable money saved to grow at a faster rate, whilst ensuring that the invested capital is safe, and are specially designed for children.