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Children’s ISA’s – What You Need To Know

It’s commonly believed that in the UK Children are exempt from tax. This is in fact a money myth.  They are treated in exactly the same way as adults, which means each child can in the 2011-12 tax year earn up to £7,475 tax free from income, savings or investments. Grown-ups who enjoy managing money sometimes look into an online accounting degree.

Usually children under 18 don’t earn that much from part time jobs etc, apart from a few young entrepreneurs, hence the often held belief that kids can earn tax free.

Assuming your child won’t earn more than £7,475this financial year (watch out child prodigies!),you can ensure that any interest is paid without the tax being automatically deducted by filling out the Inland Revenue R85 form (available from most banks or online).

Alternatively you can open a children’s ISA which allows interest to be paid free of tax plus attract a  much higher interest rate of upto 6% in some cases. Children’s ISAs were launched in November as an encouragement for children (and adults on their behalf) to save money. Many new accounts offer incentives such as piggy banks or high street vouchers. We think they should give away sets of The Financial Fairy Tales books instead as this will have a win win effect of encouraging new accounts and teaching children about money, (marketing execs take note!)

In essence children, parents, grandparents or anyone else can make deposits of upto £3600 in a tax year. The money stays on deposit where it cannot be touched until the child is 18. This makes it a great way of saving for future university fees, a first car or a gap year in the Caribbean!

Here are a round up of some of the best articles we could find on the subject of Children’s ISA’s

http://www.moneysavingexpert.com/savings/child-savings-tax-free

http://www.bbc.co.uk/news/business-15522384

Once you have decided on opening an account, this is a great opportunity to discuss the benefits of saving and start a money conversation with your children. Keep them involved with the choosing, the paperwork and making the first deposit.

Who know’s their savings might need to help look after you when your pension runs out!

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