Wouldn’t it be great if you could help pay for driving lessons and a first car? Or perhaps your dream is to help your child get on the property ladder?
It doesn’t matter what you’re saving for. By putting some money aside regularly, you’re giving your child options. And if they’re still in nappies, now could be the perfect time to save for the big milestones. The sooner you start saving, the sooner you start earning interest on the interest you earn. This is known as compound interest, which effectively turns time into money.
Explore: What is compound interest?
A children's savings account is a type of savings account that can only be opened by, or on behalf of, a child under the age of 18. They are a great way to teach children how to handle money wisely.
At HSBC UK, our Children’s Savings Account is open to anyone aged 7 to 17.
They usually pay a slightly better interest rate compared to adult savings accounts and can be used for pocket money or wages from a job.
You may not realise it, but children have tax allowances too. So it makes sense to take advantage of them if you can.
There’s usually no tax to pay on children’s accounts because the interest earned is often below the child’s tax allowances. However, special rules apply to money given by parents or step-parents.
If you give your child money that earns more than £100 in interest in a tax year, you may have to pay tax on all the interest. This depends on your circumstances, including any tax allowances you may have available. Interest on gifts from grandparents, aunts, uncles, and friends doesn’t count towards this £100 limit.
An alternative would be to open a tax-free Junior ISA (not available at HSBC), which is not subject to the £100 rule. You can save up to £9,000 for each child in the current tax year. The account can then be turned into an adult cash ISA or stocks & shares ISA when they turn 18. Any income and/or growth are exempt from UK income tax and capital gains tax.
If your child has an existing Child Trust Fund (CTF), you can continue to add up to £9,000 a year if your child is under 18. CTFs are also exempt from the £100 rule.
As with all things tax-related, the value of the benefits to you will depend on your circumstances and/or your child’s circumstances. Tax rules could also change in the future.
For more information, visit GOV.UK: Interest on savings for children.
When considering your long-term savings options, there’s a hidden risk you need to be aware of – inflation. Inflation is when money loses value as things become more expensive over time.
As the months and years roll by, inflation will reduce the total value of your children’s cash savings because you’ll be able to buy less with the money.
As you have time on your side, investing could potentially grow your money. Of course, the thing to remember about investing is there are no guarantees, and you may not get back what you put in. Investments should also be seen as a medium to long-term commitment of at least 5 years.
For more information, visit our new to investing page.
To see how much you might need to invest to cover the cost of your children's education, try our children's education calculator.
This article was last updated on 09/07/2024, 05:18
