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Saving For Children – Junior ISA

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Saving for Children – Junior ISA

victoria hicks pcwm

By Victoria Hicks – Director of City And Capital

Whilst there can be some confusion about the tax status of children, they are taxed in the same way as grown-ups. This means that a child who is resident in the UK is entitled to a personal allowance (£12,500 in the current tax year) and is very likely to be entitled to the Starters Rate for Savers and the Personal Savers Allowance.

This means that each child could potentially earn up to £18,500 in the current tax year from savings without paying tax.

To prevent tax avoidance, HMRC have set clear rules in place to ensure that parents do not transfer monies into their children’s names to benefit from these valuable allowances. If money has been gifted by a parent or stepparent, and the interest earned is over £100 per annum (not including interest earned in a Junior ISA), then the gifted money is taxed as if it still belongs to the parent.

There is, however, a popular savings options for children where the above rules do not apply, and is aimed at encouraging families to save for their children’s futures:

Junior ISA

A Junior ISA is a tax-free way to save for a child, and these are available as both Cash ISAs and Stocks and Shares ISAs. The limit is £4,368 per child in the current tax year.

You can invest in a Junior ISA for a child under the age of 18, and this could be a great way to save for further education or other expenses that arise when entering early adulthood.

Monies saved into an ISA are locked away until a child’s 18th birthday, at which time the funds become theirs absolutely (happy 18th birthday)! Until then a parent/guardian will look after this money on their behalf.

A Cash ISA is a tax-free savings account, which offers capital protection and a rate of interest. Your money should be safe, provided this is held with a UK-regulated provider and within the £85,000 limit for the Financial Services Compensation Scheme (FSCS).

Some advantages of this style of arrangement include a clear understanding of the amount invested and interest due, and capital protection. Some disadvantages include regularly having to shop around, as often attractive rates of interest are short term. Cash returns may also be lower than inflation and therefore over the longer term, the real value of the monies saved may reduce.
A Stocks and Shares ISA does not offer capital protection, and the returns are dependent on the underlying investments selected. These could be high risk, low risk or anywhere in between. Risk and reward tend to go hand in hand, with those willing to take a higher level of risk having potential for greater returns, especially over the longer term. The higher the risk however, the more chance the investment could lose money, especially in the shorter term.
Watch out… Any child born between 1 September 2002 and 2 January 2011, would have had a Child Trust Fund automatically opened for them by the government. A child cannot have both a Junior ISA and a Child Trust Fund. Since April 2015, a Child Trust Fund can now be transferred to a Junior ISA, and there is a much larger market for Junior ISAs which could offer better investment opportunities.

Did you know…

There is an estimate 1,000,000 lost child trust fund according to the charity The Share Foundation! HMRC have provided this link to help track down lose accounts

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