Opening a bank account for a child provides a useful lesson; it encourages the child to save and teaches them about the value of money. It’s also financially prudent as there are a number of tax efficient saving schemes and accounts for children.
The Child Trust Fund
The Child Trust Fund (CTF) is a savings account open to all children born between 01 September 2002 and 02 January 2011, who are resident in the UK and not subject to an immigration restriction, and who were the subject of at least one child benefit payment prior to 4 January 2011.
If eligible, upon opening an account you receive a voucher from HMRC for a sum between £50 and £250 – the amount depends on the child’s age. Low income families will be eligible for addition payments. Up to £3,600 can be lodged in the account every year. All interest is tax free and the child can withdraw the funds when they reach 18.
Junior Individual Savings Accounts
Junior individual Savings accounts resemble CTF accounts with two differences:
- they are open to children who do not qualify for a CTF
- they do not qualify for a government payment when the account is first opened.
Children’s Bonus Bonds from National Savings and Investments (NS&I)
Children’s Bonus Bonds give tax-free interest on savings for children under the age of 16. There is an additional bonus if the money is not withdrawn for five years. The rate of return depends on the bond “issue”. Sums from £25 to £3,000 can be invested per issue, per child. They’re government backed and as a result offer capital security.
Banks and Building Society accounts
Banks and building societies have savings accounts specifically for children. These accounts have personal tax-free allowances of £8,105 for the tax year 2012 to 2013. Interest up to this limit is tax-free. This differs from adult accounts where 20% tax is deducted from interest prior to payment.
There are also tax-free saving schemes which are not specifically designed for children which can be used to save on a child’s behalf so long as an adult manages the account until the child reaches a set age.
Index-linked Savings Certs (NS&I)
These savings certs must be purchased on behalf of under-sevens. £100 to £15,000 can be invested for three to five years; the investment is guaranteed to exceed inflation if held for more than a year.
Premium Bonds (NS&I)
Tax free prizes are rewarded every month following a draw. Parents, guardians or grandparents must hold the prize bonds on behalf of under 16′s, an individual can own bonds worth £100 to £ 30,000.
Individual savings account (ISA)
A tax free cash ISA can be opened at 16, a stocks and shares ISA at 18.