Protect your kids from the taxman - Video script

by Jane Baker on 29 July 2010  |  2 comments
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Find out everything you need to know about your children's savings and tax

Putting aside some savings for your children is really important if you want to help them plan for the future. But do you really know the rules? Let’s find out...

Children & tax

Many people think children automatically save tax-free. But this isn’t actually true. Children are taxed in exactly the same way as adults, and have the same personal allowance which is the amount they can earn before tax becomes payable.

That said, most children don’t use up their personal allowance each year so their savings stay tax-free.

How can I make sure my kids get tax-free interest?

This is really simple because all you need to do is complete HMRC form R85 and send it to each of the banks or building societies where your kids have accounts. This form will ensure interest is paid gross which means no tax will be deducted.

If tax has already been accidentally paid on your children’s savings, you can reclaim it for them using form R40.

Saving on behalf of your kids

There are important rules to be aware of when it comes to saving on behalf of your kids. Any interest earned on money you specifically put away for them will only be tax-free up to the first £100.

If more than £100 is earned, the whole lot will be taxed at your own rate of tax. So, if you’re a higher rate taxpayer, that means 40% of the interest will be handed over to the taxman.

This rule doesn’t apply where money is given to children by someone other than their parents or step-parents.

Why does this rule apply?

Quite simply this is to stop parents from putting their own money into their kids’ savings accounts to avoid paying tax.

If you want to find a new account for your children’s savings, check out lovemoney.com/savings.