Opening a savings account for your child is a great way to build up a nest egg for his or her future.
It also encourages kids to save and teaches them valuable lessons about money that will stand them in good stead in later life.
Children’s savings accounts work in a similar way to adult ones though interest rates tend to be higher. It’s also a little more straightforward to have the interest paid without the tax already being taken off.
You can set up an account with a bank or building society on behalf of a child of any age. However, for the account to be in the child’s name they will need to be at least seven.
Parents can invest up to £4,080 tax-free for their children into a JISA in the 2016/2017 tax year. But only children born before September 1, 2002 or after January 2, 2011 are eligible for the accounts.
Parents of children born between these dates previously had to pay into a Child Trust Fund (CTF). These come with the same annual limit of £4,080 but generally pay less competitive rates.
However, thanks to a rule change in April 2015, parents can now transfer their CTF funds into a JISA without losing the tax benefits.
With JISAs, you can put the money into stocks and shares or, if you don’t want to take any risks, into a cash account. Always compare rates across cash JISAs before deciding on an account and, if you are going for a stocks and shares JISA, check charges carefully before investing.
Savings providers normally pay interest after tax has been taken off (at the basic rate of 20%) and the onus is on the saver to reclaim it.
You can continue to control the account on the child’s behalf until they are old enough to do it themselves. There is no set rule for when this is, but many account providers – and parents – feel children are old enough when they reach16.
How much to save
Many easy access accounts (for children and adults) can be opened with just £1, so you don’t need to have a big lump sum to get started.
You may have to pay in a larger amount to qualify for a fixed rate account, however, while regular savings accounts generally require funding of at least £10 a month.
Just like adults, children have an annual personal tax allowance. For the 2016/2017 tax year, this is £11,000 which means that, unless your child stands to earn interest of more than £11,000, he or she should not any pay tax at all.
Savings providers used to pay interest after tax has been taken off (at the basic rate of 20%) and the onus would be on the saver to reclaim it using the HMRC form R85.
But since April 2016, interest has been paid gross, so there is no longer any need for non-taxpayers to submit the R85 form.
Parents or guardians saving on behalf of a child should be aware that, if the money earns interest of more than £100 in any one tax year, that interest will be treated as belonging to the parent and be taxed accordingly.
Which account to choose?
These are the basic choices of children’s savings accounts:
Easy access: These accounts allow you, or your child, to deposit and withdraw money whenever you like. They are a great for your child to start saving up pocket or birthday money, for example.
Notice account: As with notice accounts for adults, opting for a notice children’s savings account means having to wait (usually around three months) to access the money in the account. The pay-off is for this is that they tend to pay higher interest than easy access deals.
Fixed rate accounts: With a fixed rate children’s savings account, the money paid in is tied up for a term chosen at the outset, typically between one and five years. Accounts of this kind pay a fixed rate of interest that once again should be higher than you can get with an easy access or even a notice account.
Regular savings account: Regular savings accounts require you to pay in a minimum set amount each month, typically from £10 to £20, for a period of 12 months. They tend to pay even better interest rates than fixed rate accounts. However, you cannot access the money during the 12-month term, and you will need to find a new account after that time.