Children's Savings Accounts

Children's savings accounts operate in much the same way as standard savings accounts do, except that they often have to be under a parent’s name until the child is seven. Like adults, children also have a tax free allowance, which means that all income up to a certain limit - £5,435 for the 2008/09 tax year - is not taxable. Children's savings accounts are therefore a good way of saving for your child’s future; interest rates are usually higher than on standard accounts too - often up to 10% AER. There is a wide range of choice when it comes to the child savings accounts that are available, including:

• Child Trust Fund: Use your child's £250 voucher from the government to set up a Child Trust Fund, saving a maximum of £1,200 a year, tax free.
• Children's Bonus Bonds from National Savings and Investments (NS&I): Tax-free interest with an additional bonus if the money remains untouched for five years.
• Index-linked Savings Certificates (NS&I): Index-linked Savings Certificates (NS&I):  Invest from £100 to £15,000 for three or five years.  If the investment is held for the full term, the interest is guaranteed to keep pace with inflation and also have an additional fixed rate of interest paid too, tax free

• Premium Bonds (NS&I): Children can own between £100 and £30,000 worth of Premium Bonds which are entered in a prize draw every month for tax-free cash prizes.

• Individual Savings Accounts (ISAs): When a child reaches 16 years old they can open a tax-free cash ISA.

Any contribution from a parent that generates more than £100 of interest per year is treated as parental income, so that parent will have to pay tax, but interest earned from other contributions are not, such as from other family members. To ensure the interest paid on the account is automatically tax free, parents should ask for Form R85.