Our guide to tax when you’re gifting money to children. We explain the guidelines and how parents might avoid falling foul of the ‘£100 rule’.
Do children pay income tax on their savings?
Technically, yes – children are obligated to pay tax on savings, as they have the same income tax allowance as adults.
It’s uncommon, though, as children normally don’t earn money, and their savings don’t tend to produce enough interest to exceed any tax thresholds.
Like adults, children get a personal tax-free allowance, which is how much income they can make before paying any tax. This is £12,570 in the 2022-23 tax year and hasn’t changed since 2021-22.
If this income is from savings interest, there are extra tax-free allowances in addition to the personal allowance, allowing a child to potentially earn up to £18,570 tax-free in the 2022-23 tax year.
The personal savings allowance
The personal savings allowance allows you to earn £1,000 in savings interest tax-free if you pay no income tax or the basic-rate of tax.
This boosts up the total amount they can earn free of income tax from £12,570 to £13,570 in the 2022-23 tax year.
If a child’s income does exceed the personal allowance – which could be the case if they receive money from a trust, for example – you must contact HMRC, and, depending on how much money they receive, tax may be required.
The savings ‘starting rate’
In addition to this, the savings beginning rate is designed to encourage low earnings to save, by giving them an extra tax-free allowance on savings interest.
If your salary is equal to or less than the personal limit, you can earn up to £5,000 in savings interest tax-free, raising the total amount they might earn tax-free, inclusive of the personal savings allowance, to £18,570.
But for each £1 earned over the personal allowance, the savings beginning rate will fall by £1.
Here, we explain how it works in a few scenarios:
If you earn £10,000…
Your salary is below the personal allowance (which is £12,570 in 2022-23), therefore you are eligible for the full savings beginning rate, and a £1,000 personal savings allowance.
Therefore, any money you hold in a savings account can earn £6,000 of savings interest in each tax year before you’ll have to pay any tax on it.
Considering today’s interest rates, you’d have to have a massive savings pool to be anywhere close exceeding that amount.
If you earn £15,000…
You earn more than the personal allowance, but still qualify for portion of the savings beginning rate.
As your salary exceeds the personal allowance threshold by £2,430, the savings beginning rate will be decreased by the same amount, leaving you with £2,570.
You also qualify for a £1,000 personal savings allowance.
This means you can earn up to £3,570 in savings interest in each tax year before having to pay any tax on your savings.
If you earn £30,000…
You exceed the personal allowance by more than £5,000, so you don’t qualify for the savings beginning rate.
However, as you’re a basic-rate taxpayer you still qualify for the £1,000 personal savings allowance.
This implies that the first £1,000 of savings interest received in each tax year will be tax-free.
Do parents pay tax on their savings? children’s
If you’re a parent and wish to put some money into your child’s savings account, there are some severe limits in place to discourage you using their tax-free allowances as a way of bringing down your own tax cost.
If the interest on the funds you put into your savings child’s account reaches £100 a year before tax (or £200 if both parents provide money), all of this interest (not just the amount above £100) will be added to your savings income, and taxed as if it were your own.
This could mean you’re unexpectedly pushed over your personal savings allowance and will have to pay tax on the savings interest.
Only income from gifts received from biological parents, stepparents, or legal guardians count against the £100 limit. Gifts received from other family members or friends do not count toward the limit.
Think about opening a tax-free savings account.
If you anticipate that the income from your donation will be greater than £100 per year, you should think about making contributions to a tax-free investment. This can either be a tax-free Junior Isa or a cash child trust fund (CTF) if you started one of these accounts before December 31, 2010.
Each tax year, the amount that can be contributed to a Junior Isa is subject to a cap, which is set at £9,000 in the 2022-23 tax year (the same as the previous year).
Is it possible for a youngster to have both a Junior and an adult Isa?
Because of a legal gap, children are eligible for two Isa allowances after they reach the age of 16, namely the Junior Isa allowance as well as the adult Isa allowance. This occurs when the child turns 16.
Therefore, throughout the fiscal year 2022-2023, they have the opportunity to possibly deposit a sum that is equal to or greater than £29,000 into their individual Isas.
They will be able to continue doing this up to the age of 18, at which point any Junior Isas will be converted to adult Isas, and only the rules that apply to adult Isas will be in effect.
How do I go about getting a tax refund on my children’s savings?
It used to be the case that tax was automatically deducted from savings accounts. Because of this, parents were required to fill out form R85 whenever they created an account in their child’s name in order to ensure that they did not pay tax more than they needed to.
Since the personal savings allowance was implemented for basic and higher-rate taxpayers in April 2016, this form has become obsolete. This is due to the fact that all savings income from bank and building society accounts is now paid without having tax withheld from it.
On the other hand, if you believe that your child paid an excessive amount of tax under the previous system, you have the ability to reclaim that tax for them by filling out form R40 and submitting it to HM Revenue and Customs (HMRC). It takes around half a month to receive a refund.