A quick word on tax
Unfortunately, it’s a myth that children don't pay tax, they’re actually taxed in exactly the same way as adults.
However, as most children aren’t employed and earning income, they can earn up to £17,000 from savings without paying tax on it in a financial year. If the child is older and does have income, and even if they earn enough to be a tax payer, the personal savings allowance which launched on 6 April 2016 means that basic rate taxpayers can earn an additional £1,000 of savings interest tax-free.
There’s also a Junior ISA to consider, a long-term, tax-free savings accounts for children. Children can save up to £4,080 a year, as per the 2016-7 tax year limits. There are two types of Junior ISA – a cash version where you won’t pay any tax on interest earned on your savings and a stocks and shares version where you won’t pay tax on any capital growth or dividends you receive when your cash is invested.
Junior ISAs might sound similar to a normal savings account if a child doesn’t pay interest but don’t forget this lump sum and the amount of interest it earns can grow over time. It is also automatically transferred into an adult ISA at 18 ensuring savings are protected within the tax free wrapper.
You can’t have one of these if you have a Child Trust Fund, however if you would prefer to have a Junior ISA, you can ask for the Child Trust Fund to be transferred into it as the scheme is now closed.
There is though, a bit of a catch when it comes to children and tax.
If the child’s balance has been given to them by a parent or step-parent, and the interest is over £100 a year, the whole balance is taxed as though it were the parent’s cash, and taxed at the parent’s rate. If the parent is within their personal savings allowance and the child's savings don't take them over, then it'd still be tax free.
If this sounds a bit unfair, the aim of the rule is to stop parents using their kids' tax-free allowance as an extra allowance for themselves.