By Marc Simpson
While all parents wish to save for their children in order to give them the best start in life, many believe the myth that children are exempt from taxation. Sadly this is not true, and children are taxed just like adults, at their parents tax rate.
This means they have the same tax-free allowance for their savings as adults. For the 2011/12 tax year this limit is £7,475 tax-free on their savings before tax is due. However, there are some savings vehicles that bypass this limit, such as the Junior ISA, offered by providers such as Family Investments, which allow tax-free savings but have a yearly contribution maximum currently set at £3,600 a year.
Savings
When saving for a child into a regular child savings account it is important for parents to fill out an HMRC Form R85 if your child is not going to earn more than the tax-free allowance, as otherwise HMRC will withhold tax on interest at the 20 per cent rate. The form is available on the HMRC website and need only be filled out and handed in to the bank that has the child’s account.
However, there are different rules on how interest earned on money given to a child by their parents is taxed. In order to avoid parents evading tax by giving money to their child, HMRC taxes any interest above £100 a year earned on money given to a child by their parent.
Tax-free
Each parent gets the £100 allowance for their child, so if both parents give money to the child, the child can earn up to £200 a year on that money before it is taxed. There are accounts, such as the Junior ISA, which are tax free that are not subject to this rule.
The Junior ISA was set up by the Government to encourage parents to save for their child. This is why it receives tax-relief. The account gives the child a lump sum on their eighteenth birthday to start their adult life.
It is one way to save for big expensive such as a university education or first house down payment. For parents looking to save more than the £3,600 a year contribution limit on the Junior ISA, a young saver plan, another tax-free account, can be held in addition to a Junior ISA.
An alternative saving option to save for your child is the Child Tax Exempt Saving Plan. It allows you to save for your child tax free and they will recieve their lump sum when they reach 18.
MyEggNest's Top Tip: Shepherds Young Saver Plan
Child Tax Exempt Savings Plans (TESPs) are currently the most tax efficient way to save for your child - and Shepherds Young Saver Plan gives you the chance to lock away more per month than any other TESP.
The plan allows parents to save from as little as £7.50 to £100 each month - 4 times more than any other provider - and offers sickness benefits, along with the ability to withdraw up to 25% of the fund after 10 years.
For more information and reviews, click here
Bookmark this page
What is Social bookmarking? Social bookmarking allows users to save and categorise a personal collection of bookmarks and share them with others. This is different to using your own browser bookmarks which are available using the menus within your web browser. Click on the "Bookmark" link above to share this article on the social bookmarking site of your choice. Read more about social bookmarking at Wikipedia - Social Bookmarking
