Savings: Children’s Tax Allowance Means Efficient Savings

Planning for a child’s future is becoming increasingly important for parents, especially considering next fall’s tuition hike that means some children will be paying £9,000 per year for higher education.

Rather than graduating with debt, parents can use tax-efficient savings methods, such as Child Tax Exempt Savings Plans (CTESPs) or Junior ISAs.

New launch

This November marked the launch of an important tool to help parents give their children a head start amidst a future of tuition fees and large required deposits on first homes.

The product launched was the Junior ISA, which took the place of the government’s former savings scheme, the Child Trust Fund. Any children who were not eligible for a Child Trust Fund can have a Junior ISA, which keeps savings in trust until your child turns 18.

At that point, they can withdraw the full sum free of any tax.

Families can contribute up to £3,600 per year into this account, making good use of their child’s tax allowance. Many parents have been wisely using their tax allowance for years to save in ISAs, without knowing that their children can enjoy the same benefits.

The Junior ISA is particularly useful in estate planning or giving money directly to your children, as funds in it are not subject to the £100 rule. With most other methods of saving, children are only allowed to make £100 in income from money that was given to them from parents.

Above and beyond

Though Child Trust Fund and Junior ISAs have a yearly limit of £3,600, this will most likely not use up your child’s entire yearly tax allowance.

Tax Exempt Savings Plans for children can be held in addition to these accounts, meaning even more ways to save tax-efficiently.

These accounts are particularly useful for savers looking to make smaller contributions, as they build an egg nest from small, regular contributions (up to £25 per month).

Just £15 a month over 25 years could result in a lump sum of £6,330 for your child, if the investment grew at 4 percent. At 8 percent, your small monthly contributions could result in £10,900. This could mean a sizable, tax-free wedding gift, or even lift the burden of debt from a recent graduate.

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