Children's savings accounts: the uSwitch guide

Use this guide to find essential information about children's savings accounts.

For more information about some of the terms we use, click on the highlighted words.

To find the right account, compare children's savings accounts now.

Children's savings accounts work in a similar way to adult savings accounts. There are various types available:

• Easy-access children's savings account.  An easy-access children's savings account allows you to deposit and withdraw money when you wish. The account is opened in the child's name but is usually administered by the parent or guardian until the child is old enough to operate it themselves. These accounts are ideal for saving birthday and Christmas money and for encouraging the habit of saving. However, you may be able to get a higher interest rate with other types of children's savings accounts.
• Notice children's savings account.  With a notice children's savings account you have to give the bank or building society warning - typically 1 or 3 months - that you want to take money out of the account. Notice children's savings accounts may offer higher interest than easy-access accounts.  
• Term children's savings account.  A term children's savings account is an account where you tie up your child's savings for a fixed time, typically 1, 2 or 3 years. The advantage of these accounts is that they generally pay a higher rate of interest, provided you don't need to withdraw any money during that time.
• National Savings Children's Bonus Bond.  A National Savings Children's Bonus Bond is a lump sum children's savings investment made for a child by a parent, grandparent or friend. You can invest up to a maximum of £3,000 in each bond in units of £25. This type of children's savings accumulates interest at a fixed tax-exempt rate each year and earns a bonus every 5 years.
• Junior ISA. To replace Child Trust Funds, the government has introduced a new type of savings account for children; the Junior ISA. The Junior ISA allows parents and family members to contribute up to £3, 600 a year into a tax-free ISA account, which can be accessed when the child is 18 years old. Like the adult ISA, there are two different types of Junior ISA - a cash and a 'stocks and shares' version. To be eligible, the child must be born on or after 3rd January 2011, a UK resident and not currently hold a Child Trust Fund. The Junior ISA initiative will be launched on 1st November 2011.

Children pay no tax on their savings, and the interest rates on children's savings accounts often have much higher interest rates than savings accounts for adults.  Opening a children's savings account is one of the best ways to teach a child about money, hopefully encouraging them to invest part of their pocket money in the account. It gets them into the habit of saving at a young age and can provide them with funds for the future to use eventually on a major outlay like a deposit on a home, for university or their first car.

Usually a child has to be 7 to open a children's savings account in their own name - before that an account would have to be opened by a parent or guardian on their behalf. Depending on the account and the provider, the parent or guardian usually continues to administer the account until the child is old enough to do it themselves, which could be until they are in their teens.

To encourage children and parents to save for their child's future, the government introduced the Child Trust Fund in 2002. All new-born children were given a £250 voucher (children of families with lower incomes and receiving child tax credit receive £500) to put into a long-term savings and investment account which is not available to your child until they are 18. However, Child Trust Funds are now being phased out, this means that only some parents are still eligible to receive the voucher from the government to set up a Child Trust Fund. Presently, the government changes to the system mean that:

• If your baby is born before August 1st 2010, your payment will be £250
• If your baby is born after August 1st 2010 your payment will be £50
• If your income is less than £16,190, you will get £100 after August 1st 2010
• Any baby born after 1st January 2011 won't receive any payments
• There will be no top-up payments from the government after August 1st 2010.

Even though there have been changes to the Child Trust Fund system, parents, family and friends are still allowed to pay in up to £1,200 a year tax-free to contribute towards a nest egg for a child. This will not change. All savings from the Fund are tax-free but cannot be touched until the child is 18.

If you receive a voucher for your child (this will now be for a value of £50 or £100) you will need to hand it to a bank, building society, investment or other financial company that sets up a Child Trust Fund in the child's name. If parents don't invest it in time, then the HMRC will do it for them.   Find out more and compare Child Trust Funds.

This will depend on the account, the account provider and when it seems appropriate for them to do so - there's no one set rule. However, a child takes over the management of their Child Trust Fund account when they turn 16, although they don't have access to the money until they are 18.

Like adults, children have an annual personal tax allowance currently £6,035 (£6,475 for the tax year 2009-2010). So a child can earn up to this amount in interest from their children's savings account each year without having to pay any tax. In practice, most children won't have to pay any tax on their savings as they will not generally use their allowance up. To have their interest paid gross the parent or guardian should fill out an R85 form available from banks and building societies.

However, parent's should watch out if investing or saving on behalf of their child - if the money earns more than £100 interest in a tax year, the interest on the children's savings will be treated as belonging to you and be taxed as your income. This rule does not apply to gifts from other relatives.

Get the right deal for your children's savings - compare children's savings accounts now.

Child Trust Fund
A long-term children's savings account, where parents are given a voucher by the government to set up a Child Trust Fund. Child Trust Funds are being phased out.

Easy-access children's saving account
A children's savings account allowing free access to your money at any time.

National Savings Children's Bonus Bond
A National Savings Children's Bonus Bond is a lump sum children's savings investment made for a child by a parent, grandparent or friend which accumulates interest at a fixed tax-exempt rate and has a bonus after 5 years.

Notice children's savings account
A children's savings account that requires you to give notice of wanting to make a withdrawal of your money.

Personal tax allowance
The annual income tax allowance each person is entitled to - currently £6,035 in the tax year 2008/09. Your child can earn up to this amount without paying any income tax on their children's savings.

R85
The form you need to fill out in order to get your children's savings interest paid without tax deducted.

Term children's savings account
A term children's savings account may be the best children's savings account for your child if they are happy to tie up their money for two or three years.