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Children and income tax

The Which? guide to tax and your children. We explain the rules and how parents can avoid falling foul of the '£100 rule'.

In this article
Children and the personal allowance Savings interest is paid tax-free automatically 
Parents must watch out for the '£100 rule'

Children and the personal allowance

Children are liable for tax on savings, but they also have the same income tax allowance as adults. This means that they can earn a certain amount of income each year before paying tax, with anything above that liable for tax. 

Children also get a personal savings allowance but for most this will be irrelevant because their total income is unlikely to exceed their general tax-free personal allowance.

During 2018-19, adults and children will only pay tax if their income exceeds £17,850 – this is made up of the £11,850 personal allowance, £5,000 starting rate for savings and the £1,000 personal savings allowance.

In 2019-20, the personal allowance will increase to £12,500, which means that children will only pay tax if their income exceeds £18,500.

Of course, many children don’t have earnings as such, and it's unlikely they will ever exceed this allowance from other income sources, such as savings and investments.  

Savings interest is paid tax-free automatically 

Previously, parents had to complete form R85 when they opened an account in a child's name, to make sure they didn't pay tax unnecessarily. 

Since the personal savings allowance was introduced for basic and higher-rate taxpayers in April 2016, this form has become obsolete, as all savings income from bank and building society accounts is now paid without tax deducted. 

However, if you think your child paid too much tax under the old system, you can reclaim it for them by completing form R40 and sending it to HM Revenue and Customs (HMRC). It takes around six weeks to get a refund.

Parents must watch out for the '£100 rule'

If you - a parent - give your children money and it makes more than £100 a year before tax in interest (or £200 if both parents give money), all of this income (not just the income over £100) will be taxed as if it were your own.

If income from your gift is likely to breach the £100 limit, then you should put your gifts in a tax-free investment. This can be a cash child trust fund (CTF) if you opened one before December 2010, or a tax-free Junior Isa. The 2018-19 annual limit is £4,260, which will increase to £4,368.

The £100 limit applies to income from gifts from parents, step-parents, or guardians only – not other family members, such as grandparents, or friends.

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