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UK parents diligently saving for their children’s future need to be on high alert for a tax trap that could ensnare them, as revealed by a money expert
New research highlighted that British parents might be prioritising their kids’ savings over the household’s, yet remain perplexed by the options available for under 18s.
Money guru Andy Webb has flagged up a lesser-known tax snag related to the interest earned on these savings.
Speaking to Ireland Live, the Be Clever With Your Cash connoisseur warned: “This can occur if your child starts earning over £100 in interest in money you have gifted them as it is counted as part of the parent’s personal savings allowance not the child’s.”
Currently, the personal savings allowance stands at £1,000 for those in the basic rate tax band, but it drops to just £500 for higher rate taxpayers, after which savings interest is taxed at the normal Income Tax rate.
It’s crucial to note that the £100 cap on interest from children’s savings doesn’t apply to cash from grandparents, other relatives, or friends. Moreover, this limit is not relevant to Junior ISAs or Child Trust Funds, which are inherently tax-exempt.
A recent study by Smart Money People and its sister site Be Clever With Your Cash, which examined parents’ savings strategies for their children, revealed that UK parents have an average of over £4,000 saved for each child, compared to an average personal saving of just £6,250.
This could result in families with multiple children having more money in their children’s savings than in the household’s overall savings. Therefore, it’s crucial for parents to consider accounts, rates, and taxes for their children’s savings as carefully as they do for their own.
The study found that a quarter of parents are confused by the range of savings products available for their children. To help alleviate this confusion, Andy shared some key points to consider when searching for children’s savings accounts.
He emphasised the importance of checking requirements and restrictions. Many children’s savings accounts have specific rules about who can open the account and what documentation is needed, which should be checked in advance.
Additionally, some accounts limit when the funds can be withdrawn. Andy noted that while some accounts offer easy access to teach children about money management, others only allow access once the child reaches a certain age, such as 18.
Parents might also want to consider a Junior ISA, a long-term tax-free savings account designed specifically for children.
Finally, comparing interest rates and fees is another important step.
Andy advised parents to “look for accounts that offer competitive interest rates to maximise the growth of the savings as well as checking any fees”. He also suggested getting the children involved in the research to teach them valuable finance terms and skills, depending on their age.
