December 27, 2015
With the escalating costs of university fees and housing (amongst other things!) young people face an increasingly daunting financial challenge ahead of them. Therefore, it’s never too early to start saving for your children’s future!
The most common way to save money for children is through Child Trust Funds and Junior ISAs. Child Trust Funds are long term investment funds that were introduced by the government in September 2002. There are two types of fund: cash funds, which are completely tax-free, and share-based funds, which have dividends paid to them with 10% tax already deducted. Both types of Child Trust Fund mature and become available to a child on their 18th birthday, at which point they can be converted into an ISA.
Junior ISAs replaced Child Trust Funds in 2011, for children born after the 2nd January of the same year. The total amount that can be invested in a Junior ISA is set each year and is currently £4,080, for the tax year 2015-16. These investments can either be placed in a Junior Cash ISA or a Junior Stocks and Shares ISA—or, alternatively, split between the two.
National Savings & Investments (NS&I) offer two alternatives to Junior ISAs and Child Trust Funds, both of which are tax-free. These include Premium Bonds and Children’s Bonds. Premium Bonds require a minimum investment of £100 and are suitable for savers who want the chance to win up to £1 million in a monthly prize draw. These bonds are particularly popular as gifts for children from family members and friends. Children’s Bonds, by contrast, are suitable for parents who want a long-term, tax-free investment for their children and can leave their investment for a minimum of five years. The minimum investment for a Children’s Bond is £25, with a current rate of interest of 2.5%.
Other savings investments for children are liable to tax, if the pre-tax interest earned from these investments exceeds £100 per year—or £200, if both parents are contributing to the pot. In this situation, the child’s interest payments will be taxed as if they belonged to the parent—and this tax will apply to the whole payment, and not just the income that exceeds £100. However, recent and upcoming changes in tax law mean that the £100 tax-free limit on savings incomes (from interest payments) may become less of an issue in the future—provided the child’s income is assessed against that of a parent.