Tax on Interest from Children's Savings Accounts

probablynotarobot

I wanted to seek advice on the interpretation of the following from HMRC at on the gov.uk site under savings-for-children:

"if, in the tax year, the child gets more than £100 in interest from money given by a parent. The parent will have to pay tax on all the interest if it’s above their own Personal Savings Allowance."

My question is whether this means the interest earned from the parents contribution during one financial year or does it also include past financial years?

For example:

I open a savings account for my child and place £5000 in, earning £75 interests over the year (under the £100 limit).  The following year I place another £5000 into the same account so at the end of the year there is a total of £150 interest earned (over the limit of £100, unless it is based on the single £5000 parental contribution made during that financial year).

If it is historic, then it makes it difficult to track how much of the money was from a parent as apposed to other sources like grandparents/interest/etc which are not taxed this way.  If it is not historic, then what about when you need to move to another account for better interest, as usually there is a need to transfer the lump sum to a current account then over to the new child account, would this then count as a single lump contribution to the child in one year and incur the tax ()?

eskbanker

probablynotarobot said:

My question is whether this means the interest earned from the parents contribution during one financial year or does it also include past financial years?

The latter, i.e. if the child earns over £100 in interest in a tax year resulting from any parental contributions then it's taxable.

As you say, this does put the onus on parents to keep adequate records of the source of all contributions.

It's done on a per-parent basis though, so if there are two parents then they can each contribute equally to the child account and thereby achieve a £200 threshold.

Another option to consider is to use a Junior ISA to eliminate tax issues....

probablynotarobot

Thank you, it is good to clarify so I can act accordingly.

I was aware of the £100 per parent however I am a single dad so just sticking to the £100

I also have Junior ISAs for them (previously the Nationwide ones which were 3% but went down to 1% so just moved them to NS&I for 3.25%) but because this locks the money until they are 18 I also used general children's savings accounts and was wary of the £100 tax implications.

xylophone

https://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/families/babsi.htm
is old  ( takes no account of interest now paid without deduction of tax/personal savings allowance) but  explains the system.

probablynotarobot

Thanks, the link does provide some additional clarity.

toothdoctor

If interest is over £100 then excess is taken off your PSA. So kids earn £150 then your PSA is reduced to £450 (high rate tax payer) or £950 (basic rate tax payer).

cloud_dog

probablynotarobot said:

Thank you, it is good to clarify so I can act accordingly.

I was aware of the £100 per parent however I am a single dad so just sticking to the £100

I also have Junior ISAs for them (previously the Nationwide ones which were 3% but went down to 1% so just moved them to NS&I for 3.25%) but because this locks the money until they are 18 I also used general children's savings accounts and was wary of the £100 tax implications.

Of course if a grandparent or friend were to make the deposit then this rule is (obviously) not applicable....ahem 🤫

eskbanker

toothdoctor said:

If interest is over £100 then excess is taken off your PSA. So kids earn £150 then your PSA is reduced to £450 (high rate tax payer) or £950 (basic rate tax payer).

No, that's not how it works - if the interest is over £100 (per parent) then the whole amount is taxable, not just the excess over £100, so the net effect would be PSA reductions to £350 and £850 respectively in that scenario.

ratechaser

cloud_dog said:

probablynotarobot said:

Thank you, it is good to clarify so I can act accordingly.

I was aware of the £100 per parent however I am a single dad so just sticking to the £100

I also have Junior ISAs for them (previously the Nationwide ones which were 3% but went down to 1% so just moved them to NS&I for 3.25%) but because this locks the money until they are 18 I also used general children's savings accounts and was wary of the £100 tax implications.

Of course if a grandparent or friend were to make the deposit then this rule is (obviously) not applicable....ahem 🤫

Quite, this is definitely one of the more 'optional' taxes out there...