Savings and ISA's

Children’s savings accounts: the uSwitch guide

Looking for the best way to open a savings account for your child? Read our guide to children’s savings accounts to help get you started.

What types of children’s savings accounts are available?

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 ISAAllows parents and family members to contribute up to £3,720 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.

What are the benefits of opening a savings account for my child?

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.

At what age can a child open a children’s savings account?

Usually, a child has to be seven years old 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.

When can a child take over control of their savings account?

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.

Do children have to pay tax on their savings interest?

Like adults, children have an annual personal tax allowance, currently £9,440 in the 2013-14 tax year. This means a child can earn up to this amount in interest from their children’s savings account each year without incurring 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.

Glossary

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. Although now phased out, children born between 1 September 2002 and 2 January 2011 may still be eligible.

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. Your child can earn up to this amount without paying any income tax on their 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.