My father recently passed away and I inherited his entire estate. I would like to give money to my children, who are both under 10 years old. Are they going to pay tax on their savings or is it all tax free?
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The short answer to your question is yes – they could pay taxes on their savings. It’s hard to imagine a seven-year-old earning a salary, but kids get the same tax breaks as their parents.
So a child can earn £ 12,570 per year – the tax-free personal allowance for the current tax year – before paying income tax.
And since we are talking about income generated by interest on savings, there are other allowances they enjoy. The first is the Personal Savings Allowance, which allows you to earn £ 1,000 a year in savings interest before income tax begins to be deducted.
This only applies to base rate taxpayers – higher rate taxpayers receive a £ 500 allowance and additional rate taxpayers do not benefit from the personal savings allowance at all.
The second is the “starting rate” of savings. This is designed to encourage low income people to save and allows them to earn up to £ 5,000 in pre-tax interest, in addition to the Personal Allowance and Personal Savings Allowance.
This means your kids could earn £ 18,570 in savings interest before you have to worry about paying them taxes.
Suppose you have found a savings account paying 2 percent per year. Your children would need to have over £ 900,000 in a savings account to earn £ 18,000 in interest. So that shouldn’t be a problem – with a caveat.
Strict rules are in place to prevent parents from using their children’s tax-free allowances as a way to reduce their own tax bill, and therefore money placed in a savings account by a parent is taxed as s ‘it was yours once the amount of interest earned exceeds £ 100 per year (or £ 200 if both parents donate money).
When this happens, any interest earned will be added to your savings income and taxed at your marginal rate.
The way around this is to invest in a savings account with no savings for your children, known as Junior Isa.
You can invest £ 9,000 a year in a Junior Isa, and this can be held in cash or invested in stocks and stocks. Any growth from interest, dividends and capital gains will be accumulated tax-free. If you plan to donate more than the tax-free limit, consider putting that amount into their account each year.
Isa junior cash rates tend to be a bit more generous than Isa adults rates – the best on the market right now is 2.5% AER.
Once your children are 16, they become eligible for both an Isa junior and an adult Isa, the latter having an annual savings limit of £ 20,000 which means you can invest a total of 29 £ 000 per year until they turn 18, when the Isa junior becomes an adult Isa.
The attention here is that at age 18, the money is to be spent on your children – so if you plan to put that money aside for education or housing costs for the future, you need to have a discussion. meaningful with your children on the purpose of savings.
Gareth Shaw is responsible for the money at Who?. To have your question listed on this page, send an email to [email protected]