Savings accounts for children. How to help your child learn how to manage their money and save up for their first flat or driving lessons.

Setting up a savings account for your child is a good way of instilling good money management behaviour into them from an early age. Until they are old enough to look after it themselves, then you can set up a standing order into it, or use it to save their Christmas and Birthday monies so they can see how it can build up and how money is used. It also gives relatives and friends a place where they can put some cash for their loved ones. There is nothing to stop you opening more than one savings account if you want to have both an instant access one and a longer term one. 

The different types of accounts

Instant Access accounts and Regular Savings accounts

These work in the same way as adults accounts, they are cash safe and pay out some interest. Usually children’s accounts pay out a slightly higher interest rate than the adults accounts.

Instant access is just that. You can withdraw the money at any time, but the interest rate will be lower. This type of account can be handy for school or hobby clothing or equipment or trips. You can usually set up this type of account for £1.

Regular savings accounts normally have a restriction on how quickly you can take the money out, and also requires you to make regular monthly payments of which there is a penalty if you miss one. You normally have to invest a larger amount to set one of these up. This gives a higher rate of interest and also encourages saving for larger less frequent purchases.

Fixed Rate accounts
This is where the term of the account is fixed to either 1, 3 or 5 years, which gives a higher rate of interest, but you cannot access the money until the end of the term without losing the interest benefits.

Trust funds
You can invest £4000 per year into these. Your child cannot get to this money until they are 18 years old and then the money is automatically theirs. If your child is born between 1st September 2002 and 2nd January 2011 they can only pay into a Child Trust Fund, however from April 2015, you will be able to transfer into a Junior ISA without losing the tax benefits.

Currently the rates for these are not as competitive as JISAs.

Junior ISAs
JISA – you can currently invest up to £4000 tax free and again they cannot get to the money until they are 18. You can choose a stocks and shares JISA if you wish, which is higher risk but liable to a much higher return on investment. Check all the charges before you decide to transfer and before you invest anywhere. It’s worth talking to a financial adviser to help you get the best for your child’s money.
If the child is over 7 they can operate their account themselves and the account can be in their own name.

Tax deductions

The bank or building society will automatically take tax off the account just like they do an adults account. It’s not as widely known that children have a personal allowance for income tax as well. This is set at £10,000 (tax year 2014-15). Any savings below this amount will mean they won’t have to pay tax on it.

Therefore, you will need to actively ask your bank or building society to make sure that tax is not taken off your child’s account. In order to do this, you need to complete a form R85 from HMRC. Your bank or building society can give you one of these and you can complete it and give it straight back to them to process. This is something you can do while you are setting up the account.

If you have an existing account that you realise tax has been taken off, then you need to complete a form R40 from HMRC, which you can download off their website or phone to request one to be sent in the post. This needs to go back to HMRC and they will process a refund. They will also make sure that the account is set up so that future tax is not taken off.

There are tax implications on children’s savings accounts if monies from parents or step-parents paid in earn more than £100 a year in interest, so if you wish to give your child a lump sum, please check beforehand otherwise you may be chased for tax at a later date. This does not apply to Grandparents or friends who can give as much as they like. It also doesn’t apply to ISA’s, Bonds or Trust Funds.

It’s worth shopping around before you set an account up for your child. There are many to choose from and don’t feel pressured by your bank or building society to choose theirs just because you bank there. If you have a large sum to invest, it’s worth talking to a financial adviser to work out the best way to invest the money for your child’s future.

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