Tax free savings accounts for children

Every parent wants to give their child the best possible start in life, and building up a nest egg of savings for their future is one way to do this. Whether it’s to help pay for education, a first home, a gap year or their first car, having some money stashed away for their 18th birthday can be a source of reassurance for both parents and children.

 

One of the simplest ways to save for children is via a junior ISA. These are an initiative by the Government to help parents save for their children's future. They’re open to all children under 18 who were born before 1st September 2002 or after 3rd January 2011 (children who were born between these dates will already have a Child Trust Fund, and are therefore not eligible for a junior ISA).

 

What is a junior ISA?

Launched in November 2011, junior ISAs offer parents the chance to set up tax-free savings and investments in their child’s name. In terms of rules and regulations, junior cash ISAs operate on a similar principle to regular cash ISAs. Switch providers, but only one junior cash ISA can be held by each child at a time. Unlike Child Trust Funds, junior ISAs don't involve any Government contribution. The 2012/13 tax year allowance for junior ISAs is £3,600, and this will rise to £3,720 after 6th April 2013. This allowance can either be put into a junior cash ISA or divided between a junior stocks and shares ISA and a junior cash ISA in whatever proportion you wish.

 

Junior ISAs offer each eligible child a tax-free savings account into which parents, family or friends can contribute funds to help save for the child's future. Junior ISAs first become available in November 2011 to replace the now-defunct Child Trust Fund, which means children who were born during the period in which Child Trust Funds were in operation are not eligible for junior ISAs. A junior cash ISA can be opened by the child's parent or legal guardian. Once the child reaches 16, they'll be able to manage their own account. However, they won't be able to withdraw money from the account until they reach the age of 18.

 

Who can open a junior ISA?

ISAs can be opened by anyone who has parental responsibility for an eligible child. One ISA can be opened per child. Management of the ISA passes to the child when they turn 16. However, funds remain inaccessible until the child turns 18, after which they can either withdraw the funds, or have their account roll over into an adult ISA.

 

What are the advantages of junior ISAs?

  • Junior ISAs provide parents, friends and family members with a convenient, tax-efficient way to save for a child's future.
  • The money saved in a junior ISA stays tax-free once the child reaches the age of 18.
  • The money is locked away until the child turns 18, which stops your teenager from being tempted into spending it on unimportant items.
  • If you want to save an annual amount for your child that generates over £100 in yearly interest, a junior ISA ensures that this interest isn't taxed.

 

What are the disadvantages of junior ISAs?

  • If your child already has a Child Trust Fund, they aren't eligible for a junior ISA, and there's currently no facility to transfer money from Child Trust Funds into junior ISAs.
  • Everyone in the UK under 65 is permitted an annual earnings allowance before they're required to pay any income tax. In 2012/13 this is £8,105. Unless your child is exceptionally high-earning in their own right or receives savings contributions that generate interest of over £100 per year (see above), it's unlikely they'll be exceeding this figure. Most children can therefore earn tax-free interest on money set aside for them in any savings plan, as long as the parent opening it on their behalf fills out an R85 form when the account is set up.
  • Once your child reaches 18, the money is theirs to spend or save as they wish. If you've got a specific savings goal in mind for your child - for example, a mortgage deposit - you might be better off setting up a savings account in your own name so that you can ensure the money is used for the purpose you originally intended.