You are here: Home - Saving & Banking - News -

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

0
Written by: Paloma Kubiak
01/08/2016
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 unbiased.co.uk 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 unbiased.co.uk, 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.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Rail strikes: Your travel and refund rights

Thousands of railway workers will strike across three days this week, grinding much of the transport system to...

How your monthly bills could rise as the base rate reaches 1.25%

The Bank of England has raised the base rate to 1.25% as predicted – the fifth consecutive rise in just six ...

Low-income pensioner? You could gain £3k top-up

Hundreds of thousands of retirees struggling with a low income are missing out on Pension Credit worth £3,300...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week