When opening a child's savings
account, you need to consider things like interest, accessibility
and taxes.
You need to shop around for the
best deal for your child. Think about what you as an
adult would look for, then look for the same requirements
for your child or use that information to advise them
on how to find the best deal.
Things to consider:
Accessibility –
how quickly can you withdraw money from the account?
Sometimes there are penalties for short-notice withdrawals.
Interest – some children’s
accounts pay a higher rate of interest than others (the
idea is to encourage children to save).
Income
tax –
children have a personal income tax allowance of £4,745
(for the 2004/2005 tax year). As long as the total amount
of all of their taxable income – including interest
– falls within the allowance, no tax will be payable.
Keep in mind, though, that special rules apply to interest
income produced by money given to children by parents.
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Opening a Child Savings account:
You can
open a savings account for your child from birth, but
initially only you – on
behalf of your child
– will be able to deposit and withdraw money. Depending
on the bank or building society, children can start making
their own deposits and withdrawals from between the ages
of eight and 12.
Some
savings accounts have a maximum age limit – up to 21 years old in some cases. Others
have a minimum age, so you’ll find some accounts
are only open to 11 year olds and above. Many banks and
building societies offer cashpoint cards to children
aged 13 and over, and those over 16 can get a cheque
book. Under 18s may not get an overdraft.
Should your bank or building society take off tax?
When
you open a savings account for your child, you’ll have to decide whether you
want the bank or building society to deduct tax from
the interest they earn. If you don’t tell the bank
or building society anything, it will automatically deduct
tax. You can ask the bank not to take off interest if
your child's total taxable income is less than their ‘personal
allowance’ (the amount of money a person can make
before paying any tax).
However,
if your child has gifted money from either parent that
earns more than £100
a year in interest (or £200 from both parents),
you cannot ask the bank to pay interest without tax.
In this case the tax will be taken off, and your child
will not be able to claim it back at the end of the tax
year.
To help you decide whether
your child will be eligible for tax-free interest,
you can read the Inland
Revenue's Helpsheet for Form R85(2004 New). If
your child is eligible to receive tax-free interest,
complete Form
R85 (2004 New), ’Getting your interest without
tax taken off’, and give it to your child’s
bank or building society. Any future interest will
then be paid without tax taken off. You can download
the helpsheet and form at the links above or get them
from a local bank or building society.
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Child Savings and Child Trust Funds
