A new study has revealed UK parents could be saving more for their children than for the entire household, but there is a tax predicament to be mindful of
UK parents are diligently squirrelling away funds for their kids’ future, but a worrying tax situation looms they might not be aware of.
Piggy banks are swelling as new findings show British mums and dads might be prioritising their little ones’ savings over the family’s, yet many are baffled by the child-specific financial products out there. However, alerting to a sneakily complex tax snag is money expert Andy Webb, who has cautioned that although tax is usually a no-show on kiddies’ cash stacks, put too much in and HMRC might want a slice of the pie.
Andy Webb of Be Clever With Your Cash told Ireland Live that if youngsters start raking in more than £100 in interest from money gifted by their parents, it counts towards the adults’ personal savings allowance not the children’s.
Andy explained: “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.”
Right now, personal saving allowances stands at £1,000 for those on the basic tax rate, whereas higher rate taxpayers get a slim £500 cut before their savings interest faces the taxman’s music. Once you hit that limit, any further interest gets taxed at the same rate as your Income Tax. Crucially, the £100 cap on interest doesn’t extend to contributions from generous grandparents, uncles, aunts or pals nor does it affect Junior ISAs or Child Trust Funds which are built to be tax-free zones.
The new study by Smart Money People and its sister site Be Clever With Your Cash, which looked into 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 of just £6,250 saved for themselves. This could mean that families with multiple children might have more in their children’s savings than in the household’s, so it’s crucial that parents give as much consideration to accounts, rates and taxes for their children’s savings as they do for their own.
The study found that a quarter of parents are baffled by the savings products available for their children. To help clear up any confusion, Andy shared some key points to consider when searching for children’s savings accounts. He highlighted the importance of checking requirements and restrictions. Many children’s savings accounts have rules about who can open the account for a child and what documentation is needed, which Andy advised checking in advance.
Likewise, some accounts limit when the money can be withdrawn. Andy pointed out that some allow easy access to help teach children about money management, while others only permit access to the funds once the child reaches a certain age, such as 18. Parents might also be thinking about a Junior ISA, a long-term tax-free savings account for children.
He also stressed the importance of comparing interest rates and fees.
Tied in with the potential tax implications on the interest, Andy emphasised that parents should “look for accounts that offer competitive interest rates to maximise the growth of the savings as well as checking any fees”.
He also recommended involving the kids themselves in the financial research process to impart crucial money management skills, depending on their age.
