Most of us will face expenses in later life such as
university, new car, wedding and first home. If you can afford to start
saving for your children, a nest egg in later life can be a huge
benefit. Saving just £30 a month for 18 years at an interest rate of
4.5% will amount to almost £10,000. Bank and Building Society
AccountsMost banks and building societies offer savings accounts
specifically designed for children. These savings accounts are open to
children of a certain age ranging from birth to 24 years. The interest
paid on these savings accounts is often higher than that paid on
standard accounts.
Some children's savings accounts have restrictions
as to how many withdrawals can be made without losing interest. How you
can access your savings depends on which account you choose. Some may
not require notice to be given to withdraw cash; they may be
branch-based savings accounts or come with a passbook or cash card.
Some providers also offer regular savings
accounts for children that come with restrictions on the maximum and
minimum amounts that can be invested each month. They usually have a
restriction on the number of withdrawals, which if exceeded can mean a
dramatic drop in the rate of interest paid or even that the savings
account has to be closed. A certain number of monthly payments also have
to be made into these savings accounts each year to prevent loss of
interest or closure.
Tax on children's accountsInterest on savings is usually taxed at 20% before it is paid. However, children also have a personal tax allowance
which stands at £5,035 for the 2006-07-tax year. When opening an
account for your children, you can complete a Form R85 for each account
to receive interest without tax deducted. Young people aged 16 or over
complete this form themselves.
Obviously there is no limit to the amount that you can invest
for your children, but be aware that the interest may be taxed if they
are under 18 and are unmarried. Parents and step-parents each have a
£100 limit on interest earned. This means that if money given produces
interest of more than £100 a year, that interest is treated as the
income of the parent who gave the money. However, each parent has a £100
limit, so you can receive interest of £200 a year without having to pay
tax.
Grandparents or friends and other relatives
can give as much money as they like without interest being taxed as
their income. Inheritance tax exemptions may mean that tax will not have
to be paid on cash gifts given to children but if the provider dies
within seven years this may change.
Child Trust FundsThe Child
Trust Fund (CTF) is a Government savings scheme that came into effect on
6 April 2005, for children receiving Child Benefit who were born on or
after 1 September 2002. Under the initiative the Government provides a
minimum of £250 in the form of a voucher, to be presented to one of the
Child Trust Fund providers to open a tax-free account on behalf of the
child.
- Parents, grandparents and friends can make additional deposits, up to a maximum of £1,200 each year.
- When the child reaches the age of seven, the Government will donate a further sum, currently proposed at a minimum of £250.
- At age 16 the child can begin to make decisions about how the money is managed.
- No withdrawals are permitted until the child is 18.
- Once the child is 18, the CTF will close and the resulting funds will be made available to him/her.
- If an account is not opened before the voucher expires (12 months from issue) HM Revenue & Customs will open a stakeholder CTF account.
