Children's savings accounts

Many savings accounts are marketed specifically at children. Watch out for gimmicks!

How children's savings accounts work

Children's savings accounts operate like ordinary savings accounts although before the age of seven the account must be in the parent's name with the child's initials attached. If your child is old enough, the account can be opened in your child's name alone, which would mean that he or would effectively have control over it (unless you manage to hide the pass book cleverly enough). In general, banks and building societies offer better rates for children's accounts so you might feel it is worth opening one, even if you don't have control over how your child uses it. Beware of accounts that make a big noise about free gifts however. Usually, these are merely there to disguise a low interest rate.

Tax allowances

Children have their own personal allowance for tax purposes in the same way as adults do. So, as long as any income doesn't exceed the allowance, any income received will be free of tax. To that end, parents should make sure they ask for Form R85 (a Revenue & Customs form) when opening an account for their child to ensure the interest is automatically paid tax-free.

Note that any contributions to the account by the parents which generate interest of more than £100 a year each will be treated as parental income and will result in the relevant parent paying tax on it. Interest earned on contributions made by the child or friends and relatives is not subject to this rule so it may make sense for you to buy all the birthday and Christmas presents and persuade your family to hand over money instead!

National Savings Children's Bonds

These are designed for children up to the age of 16 and can be bought by parents and relatives in batches of £25 up to a maximum of £3,000. They last for five years at a time and interest paid is tax-free with a bonus being paid at the end if the bond is kept for the full five years. At 16, the child takes control of the bond and can reinvest it in a further bond, tax-free, until they reach 21.

The guaranteed interest rates are not great particularly if the bond is cashed in early. Whether the tax-free element is worth considering is a moot point as children don't usually generate enough income to pay tax anyway.

View our Saving For Kids brochures.

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