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Best ways to save for children

Discover the smartest ways to build up savings for your kids, how children's savings accounts work and the perks of Junior Isas.

In this article
Open a Junior Isa Buy NS&I premium bonds Children's easy-access savings Children's regular savings
Income tax rules for children  Start investing for your child Set up a pension for your child

Open a Junior Isa

Junior Isas are a tax-free way to save for your children. Parents and other relatives can save up to £4,260 in the 2018-19 tax year in a Junior Isa - which will increase to £4,368 in 2019-20. The money can only be accessed when the child turns 18. 

Like standard Isas, Junior Isas can be held in cash or stocks and shares, or you can divide the allowance between both. 

Government-backed provider National Savings and Investments (NS&I) launched its first Junior cash Isa in August 2017, having announced that it would stop accepting new applications for its children's bonds from September 2017. 

Parents already holding NS&I children's bonds can keep them until they mature, typically five years from when they were bought.

Find out more: Junior Isas explained – read our complete guide to Junior Isas

Buy NS&I premium bonds

Parents and grandparents can open NS&I premium bonds for under-16s, which may be held in the child’s name. Instead of paying interest, each bond number is entered into a monthly prize draw with the chance to win between £25 and £1m. 

On the plus side, all winnings are tax-free but, of course, there's no guarantee that you'll win anything at all. The odds of each £1 bond number winning is currently 30,000 to one. 

Find out more: Premium bonds – all you need to know about National Savings & Investments

Children's easy-access savings

Children's savings accounts work in a similar way to ordinary savings accounts, with the maximum age ranging from around 15 to 20 depending on the account you choose. 

While these accounts have the advantage of allowing you to contribute and withdraw money whenever you want, any interest earned is liable for tax.

Find out more: Children's savings accounts – get the best rates on the market

Children's regular savings

If you're able to commit to making monthly contributions, then you can often benefit from higher rates of interest with a regular savings account. 

They're ideal for savers who are saving for something specific and wish to drip-feed cash into their account in a disciplined way.

These accounts will usually limit the number of withdrawals you can make each year and restrict the amount of money you can invest each month. 

Be careful not to miss a payment or exceed the limit on withdrawals, as doing so can cost you interest.

Find out more: Different types of savings accounts – learn about the alternatives

Income tax rules for children 

Most children don't earn a salary or any other income, so they can receive as much as £17,500 from savings without paying tax. 

Like adults, children are entitled to a tax-free personal allowance of £11,850 in the 2018-19 tax year; the £5,000 starting savings allowance at 0%; and the £1,000 personal savings allowance. 

This will increase in 2019-20, as the personal allowance will go up to £12,500.

Previously, parents would complete HMRC form R85 so that any interest would be paid tax-free. 

This form is no longer necessary because all savings income from your bank or building society accounts is paid without tax deducted (to coincide with the introduction of the personal savings allowance). 

The only catch is the '£100 rule for parents' whereby savings given to a child by a parent or step-parent is taxed at the parent's tax rate (basic, higher or additional) if it generates more than £100 a year in interest. 

Importantly, this doesn't apply to grandparents and other family members or friends. 

Find out more: Children and income tax – get to grips with the rules

Start investing for your child

You can hold investments on behalf of your child in a bare trust or a designated account. 

A designated account will be earmarked for your child but will be in your name and treated as your investment.

Any income of more than £1,000 will be taxed at your rate, whereas a bare trust will be treated as your child’s for tax purposes.

Set up a pension for your child

If you're thinking of taking a very long-term approach, you could take out a pension on behalf of your child and pay in regular amounts. 

You can currently contribute up to £2,880 each tax year, which is boosted to £3,600 including tax relief.

When your child reaches 18, ownership of the pension will transfer to them and they can start making their own contributions.

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