Many parents, grandparents and relatives will be scrambling for gifts to give children this Christmas.
With seven in 10 parents worried they are not saving enough for their children’s future, why not help them get ahead this Christmas?
Initially, parents can save on their child’s behalf and then hopefully encourage them to save at least some of their pocket money when they are old enough.
An added advantage is that this helps children understand the value of building up some personal savings for something special.
We look at the best ways to put money aside for your children for the future – and get them the best possible returns.
A Christmas present for the future: Giving cash can be an excellent option this festive period
Junior Isas
Junior Isas replaced Child Trust Funds in 2011. They allow parents to save tax-free for their children up to the age of 18.
You can save up to £9,000 in a Junior Isa in the 2023/24 tax year, which ends on 5 April 2024.
There is usually no tax to pay on children’s accounts – unless the child has an income that exceeds the £12,570 personal allowance in a single tax year.
If you, your friends and family were able to gift a total of £9,000 a year to a child, which is the current Junior Isa allowance, at a rate of 5.49 per cent (the current best Junior Isa rate, from Bath Building Society), you could give them almost £265,000 when they reach 18.
No withdrawals are allowed from Junior Isas until the child’s 18th birthday, except in cases of death or terminal illness. Upon reaching 18, only the child can withdraw the money.
The rates on cash Junior Isas are better than standard savings accounts. A selection of the best is below and you can check all the top Junior Isa and children’s savings rates here.
Like a normal Isa, there is also a cash and stocks and shares option for the Junior version where you can invest in funds and investment companies.
Research from the Association of Investment Companies trade body shows that if a parent, grandparent or guardian had invested a one-off £1,000 in the average investment company for a child 18 years ago, it would now be worth £4,803. That’s an annualised return of 8.3 per cent.
If they had made monthly contributions of £50, for example, their total investment of £10,800 over 18 years would now be worth £27,530.
Most DIY investing platforms offer a Junior Isa. Look for those with low charges that suit how you will invest and offer any assistance you may need.
>Read our guide on how to save and invest for your child’s future
Savings accounts for children
Children’s savings accounts are essentially the same as adult ones and are offered by a handful of banks and building societies.
There are a few differences, but mostly they’re simple, safe cash accounts that usually pay some interest.
Much of the difference does come down to marketing. However, there are some quirks of the deals that make them more suited to younger savers.
You can open a savings account with just £1 for any child aged up to 18. For a children’s savings account to be in your child’s own name, your child will have to be aged seven or above.
Opening a savings account can be a good way to get kids into to the habit of saving from a young age.
For example, if you gifted £100 a month to an account paying 5.8 per cent, which is what you can currently earn on a top children’s regular savings account, your child could have more than £16,100 after 10 years – or over £37,500 after 18 years.
Anna Bowes, co-founder of savings experts Savings Champion says: ‘The sooner you start saving the better for your child the better. By putting something away from them when they are born, they could well have a significant amount of money to pay university fees or perhaps a deposit of their first house.
‘If there are friends and family members who would like to save for your children, you could consider asking them to contribute to a standard child’s account (or cash Isa if they are 16 or 17).
‘As a parent, you can deposit cash into the most tax-efficient vehicles for both your child and yourself, regardless of who contributed and how much interest is earned.’
What about tax?
Like adults, children have a personal allowance for income tax – £12,570 for the tax year of 2023/24.
If their annual income (including savings interest) is below this amount, they won’t have to pay tax on it.
Parents and guardians should be aware that once the amount they have gifted to their children starts to grow there could be a tax liability to watch out for, if the funds are outside an Junior Isa.
Children have their own personal allowance, so for the majority there will be no tax to pay on their savings interest. There may be a tax liability to parents on the interest earned on any money they gift to their children, until they reach the age of 18.
This even applies to interest on cash gifted by a parent deposited in an adult Isa in the child’s name. Adult cash Isas can be opened from the age of 16, although not all providers will accept under-18s.
Importantly, the minimum age will be changing to 18 from the new tax year, so parents and guardians need to move quickly to take advantage of it.
Bowes explains: ‘If the total gross interest earned on all cash gifted by each parent is more than £100 per year, then all of it, not just the excess, will be treated as that parent’s interest for tax purposes and therefore they may need to pay tax at their marginal rate – if it takes them above their Personal Allowance or Personal Savings Allowance.’
‘If the gross interest earned is less than £100 for each parent’s gift, it is considered so minimal that parents do not need to declare it.’
