Children can generate their own income, whether through interest on savings accounts or earnings from part-time jobs like a paper round. Like adults, children have allowances, such as personal, savings, and dividend allowances. However, specific anti-avoidance rules are in place to prevent parents from leveraging their children’s tax-free allowances to lower their own tax obligations.
Earned Income
For taxation purposes, children are treated similarly to adults regarding earned income. They are entitled to a personal allowance, meaning income within this limit remains untaxed. If a child engages in trading, such as selling items on online platforms like eBay, they can benefit from the £1,000 trading allowance. However, children under 16 are exempt from National Insurance contributions.
Savings Income
Typically, a child won’t need to pay tax on their savings income unless the amount is considerable. The same tax-free rules apply as they do for adults—income is untaxed as long as it is covered by the savings allowance, personal allowance, or the savings starting rate band.
A key exception occurs when a child earns over £100 in interest from funds given by a parent. With a 5% interest rate, this situation arises if the child receives a gift exceeding £2,000 from a parent. If the interest surpasses £100, it is attributed to the parent’s income instead of the child’s. Consequently, if this interest is not covered by the parent’s savings allowance or any remaining personal allowance, it will be taxed at the parent’s marginal rate. In such cases, the parent’s gift is considered a settlement. Monitoring the interest earned is crucial, as rising interest rates could push the annual interest over the £100 threshold, triggering the anti-avoidance rules.
This rule does not apply to funds given to a child by grandparents, other relatives, or friends—the income remains taxed as the child’s, no matter the amount.
Hannah, an 11-year-old, receives £10,000 from her mother Louise, who inherited the money. The account earns 5% interest annually, resulting in £500 per year. Since this interest exceeds £100, it is taxed as Louise’s income. If Louise has exhausted her personal and savings allowances, she will be taxed on this interest at her marginal tax rate.
In contrast, Hamish, also 11, receives £10,000 from his grandfather, who downsized his home. The interest from the account, amounting to £500 per year, is considered Hamish’s income. As this falls within Hamish’s personal savings allowance, it remains tax-free.
The Solution
To avoid the tax implications when the money is given by a parent, one could consider investing in a Junior ISA. Parents or guardians with parental responsibility can open a Junior ISA, although the funds in the account belong to the child.
There are two types of Junior ISAs: a cash ISA and a stocks and shares ISA, with a child permitted to have one of each. Annual contributions can be made up to the Junior ISA limit, set at £9,000 for the 2024/25 tax year. This limit applies across both types of accounts combined. Income generated within a Junior ISA is tax-free, as are dividends from stocks and shares held in a stocks and shares Junior ISA.
Let Us Help
If you are worried about your child’s income or investing in their future, Contact our expert team today for advice and let us help you set them up for a secure future.
