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Children’s savings could be costing parents £6,000 in tax

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06/12/2007

Parents who regularly pay money into their child’s savings account could be faced with a tax bill of more than £6,000 over 18 years, according to Nationwide Building Society.


The tax problem is compounded because of the inequality between those children that have Child Trust Funds (CTF) and those that don’t. The first batch of CTF babies turned five in September this year and their parents can save up to £1,200 every year for 18 years2 tax-free.  There are approximately 10 million children in the UK who are too old to qualify for a Child Trust Fund (CTF) and too young to invest in an ISA (over five and under 16) and are therefore denied the opportunity to save a tax-free lump sum of this size. 
If these children’s parents are saving regularly on their behalf then the parents will become liable for income tax on the interest earned from their children’s savings once the income in any tax year exceeds £100. This means that a parent saving £100 a month (the maximum monthly savings deposit allowed on a CTF) for their child could have to start paying income tax on the interest within two years. Over 18 years this would be more than £6,000 in tax.
Nationwide is calling on the Government to change the tax rules to help these 10 million children and their parents. Matthew Carter, director for savings, says: “We are encouraged by the Government’s commitment to Child Trust Funds, however they are ignoring 10 million other children who are not eligible by not addressing this tax inequality.
“Having seen children’s savings balances increase by over 90% in the last six years, and with the average interest payment on children’s accounts at £92 this year, children and their parents are saving more and could find they will have to start paying tax on the interest earned.  The Government should acknowledge this, by allowing non-CTF children the opportunity to save as much as their eligible counterparts in their non-CTF savings accounts.”

 

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