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Parents: you could be paying unnecessary tax on children’s savings

Written by: Paloma Kubiak
There are a number of tax-efficient savings vehicles in the UK, but many, such as children’s savings accounts, aren’t being used effectively, leading to huge amounts of unnecessary tax payments.

Despite the low interest rate environment, for younger savers and their benefactors, there are still ways to make money work harder for the long-term.

The latest Tax Action 2016 report found that £1.3bn was wasted last year through a lack of take-up of ISAs and Junior ISAs. If nothing changes this year, by not using the ISA tax allowances, people would waste a total of £1.95bn in unnecessary tax.

Analysing the most recent statistics on the now ceased Child Trust Fund (CTF) accounts, Prudential and found that between January 2005 and December 2012, 6.3 million CTFs were opened, and of these, 1.3 million funds (21%) had contributions made into them in addition to the amount provided by the government. During its last year (2012) the average additional contribution was £295.

Comparing these figures to the most recent from HM Revenue and Customs, 365,000 Junior Cash ISAs have been opened since their introduction in November 2011, and have an average of £1,110 per account, adding up to a total of £405m.

With the 6.3 million CTFs, this equates to a combined take-up of junior savings products (CTF or Cash JISA) of 49%, meaning that nearly seven million under-18s are still without any tax-free savings account or CTFs in their name.

Unbiased said that if these seven million under-18s without a savings account were to open a JISA, and the same rate of savings activity as witnessed with CTFs was applied, 21% of those accounts would receive contributions of an average £295. This equates to an additional 1.4million under-18-year-olds putting aside a total of £422m annually.

Further, as well as protecting the money until the child turns 18, JISAs also act as protection for parents as all contributions made by parents would otherwise be counted as their income and therefore be liable to tax.

Karen Barrett, chief executive at, said: “In the current environment of historically low interest rates, there seems little incentive to save. However, given that today’s young people are the ones facing the most uncertain future economically, a JISA is still a good bet as it locks the money away until the child turns 18.  Returns on cash are poor at the moment, but children can also have a Stocks & Shares ISA, which over the long-term could deliver significant returns and provide a good lump sum once the money is accessible.

“The main thing is for parents and grandparents not to eschew savings for their children – it might not look like a good use of funds right now, but with the lack of certainty for today’s youth, it’s crucial to establish long-term savings plans for your children as far as you can afford to do so.”

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