Tax efficient way to save for child's education?

RSharkR

Hello everyone, I'm hoping to get a bit of advice.

I'm currently an additional rate taxpayer as I work as a contractor which means a relatively high day rate but no pension/annual leave etc (I put a good % into a private pension to reduce tax).

I have a 3 year old daughter who is currently at the pre-school (nursery equivalent) of an independent fee paying school, which I'd ideally like to keep her at (they operate up to age 18). Inevitably this comes with a cost which has increased thanks to the removal of the 20% VAT exemption. I expect it to be about £15-20k per year on the basis of current fees.

From an early age I've been trying to squirrel money away for her as follows:

• I max out the Junior stocks & shares ISA allowance each year (as well as my own ISAs).
• I have the max £50k of premium bonds in her name.
• I have a children's savings account (2.2% interest under £10k) set up which I put all her birthday money etc into.
• I have a Barclays Blue Rewards Saver Account in my name (2.5% interest on months with no withdrawals) which I have a monthly automatic payment of £500 going into - there is about £13k in that currently and my plan is to try to always keep one year ahead of the school payments just in case!

The problem is that because the latter account is in my name, I'm taxed on it at 45%. To be fair its only getting about £300 interest per year (so far) but it still feels somewhat unfair to be having to give nearly half of that back to the Govt when I'm trying to save it for her education. I just wondered if there's something I'm missing and if there's a better way of doing it?

I was thinking of putting it all of it into her Junior Savings Account (its a shame I can't open more than one for her) but I see that any interest over £100 is taxed according to my tax rate anyway, so I don't think the result would be any different.

Are there any other alternatives where I can put this monthly money aside, and get to it in future when I need to pay the school bills, but not be hit by 45% tax on everything I save for her?

Thanks in advance.

Woodstok2000

One point to note, which i assume you're already aware of, but the junior isa is no good for school fees as you cant access it - it will become your daughters money to manage at 16, and she can access it at 18.

RSharkR

https://forums.moneysavingexpert.com/discussion/comment/81934460#Comment_81934460

yes, thankyou, I understand that. I just included it above for completeness and to demonstrate that I’m covering the tax-free bases I know of, and because I’m sure someone will say “have you done a JISA too?”

Woodstok2000

https://forums.moneysavingexpert.com/discussion/comment/81934503#Comment_81934503

Understood, that's good. Youve covered all the options I can think of, hopefully others will have some suggestions.

For the junior saver, the £100 interest limit is only for money given by the parents. Monetary gifts from Grandparents, relatives, friends etc aren't included.

poseidon1

As indicated by Woodstok2000, interest bearing arrangements dont really work for you due to the parent/settlor tax trap ie interest on child accounts funded by the parent is liable to tax at parent's marginal tax rate.

What you could explore on a lump sum investment basis are

1. Low coupon government gilts - profit on redemption CGT free with minimal taxable income
2. Insurance company investment bonds.

With regard to investment bonds, these can be invested in your own name intially ( for control) and assigned to your child on attaining age 18. She can then encash and likely avoid an income tax charge on any profits made, which you would have otherwise been liable for if encashed in your own name. Best to consult an IFA if you consider this option worth exploring.

Incidentally, a friend of mine has his 14 year girl in one of UK's top private girl's school. On a day school basis ( not boarder), he is just shy of £37k per year in fees. Once your child hits age 11, the fee rise could be quite steep, assuming the school survives that long.

RSharkR

https://forums.moneysavingexpert.com/discussion/comment/81934593#Comment_81934593

Thank you … yes indeed, many are struggling now and may hike their prices more over the coming years. For now, the only thing I can base my financial planning on is the current fees (I could maybe factor in a % increase too), and they have all years 4-18 posted openly on their website so that's what I'm basing it on. I recognise that the fees are relatively low compared to elsewhere in the country. I have to say that if they were any higher, or if my circumstances dramatically changed (my partner only works part time on minimum wage), I'd have to reconsider but of course its very hard to take a child out of a school they're happy in…hence my focus on trying to secure what cash I can in advance.

xylophone

You and your daughter's mother are both using your own ISA allowances to the full?

RSharkR

https://forums.moneysavingexpert.com/discussion/comment/81934729#Comment_81934729

Yes, all three of us have the max Premium Bonds and max annual ISA allowance

DRS1

Index Linked Gilts are a good idea. But you probably want to hold them to maturity and they may not mature at convenient times for paying school fees.

daveyjp

If you have excellent primary schools locally I'd suggest you consider missing out years 1-5 of fee paying school. Go back in at year 6 then on to secondary.

artyboy

https://forums.moneysavingexpert.com/discussion/comment/81936064#Comment_81936064

Exactly what we did. Spent the money on an expensive house because it was in a catchment for an excellent rated primary. As elitist as it might sound, it was a very nice school populated with the kids of professional middle class parents. Swimming pool and all sorts of other baubles funded by generous donations at PTA events. Cheese and wine evenings, that sort of thing 🤣

And they then decided they wanted to go to the local secondary academy, which was a bit more of an eye opener for them, but they coped well. And we get to retire 10 years earlier. And the house has more than retained its value.

Win win. When I think how it could have turned out. By the way, I hated boarding school…