Martin Lewis, founder of MoneySavingExpert.com, has issued a warning about a little-known tax rule that could leave parents footing a tax bill on money they thought belonged entirely to their child.
How the rule works
In a clip shared on his official TikTok from his BBC podcast, Lewis explained the rule in detail. He began by addressing a common misconception: "Do children pay tax? Many people think they don't, but actually children mostly pay tax just like adults."
Children can earn up to £12,570 per tax year without being taxed, and most children do not earn anywhere near that amount, so their income is rarely taxed. However, there is one important difference parents need to know about.
Parents hit by the tax rule
"If a parent or step parent — not a grandparent, auntie or uncle — is putting money away for their child in their child's name, in a children's savings account, say, and that earns over £100 a year of income or interest, and it's money from the parent, then that is taxed at the parent's marginal savings tax rate," Lewis said.
This means parents could find themselves paying tax on savings they have put away in their child's name. The rule exists to prevent parents from using a child's tax-free allowance to shelter their own savings from tax. "If not, then what many parents could do is they could simply put all their savings into their children's name to use their tax free allowance," Lewis added.
The solution: Junior ISAs
The solution Lewis pointed to is the Junior ISA. He explained: "If you are a parent looking to give a substantial chunk of money to your child, that's when a Junior ISA comes into its own. You can put up to £9,000 per tax year in a kid's name, and then it's always tax free."
Unlike a standard children's savings account, money held in a Junior ISA is completely protected from this tax rule regardless of how much interest it earns. For parents saving smaller amounts where interest is unlikely to exceed £100 a year, a standard children's savings account is unlikely to trigger the rule. But for those putting away more substantial sums, a Junior ISA is the more tax-efficient option and avoids the rule entirely.
Additional details
The £100 threshold applies separately to each parent's contributions. If both parents are contributing, the threshold is assessed individually rather than as a combined total.
A spokesperson for baby care experts For Your Little One added: "Caring for a child means thinking about both the present and the future. Just as parents invest thought and care into the products they choose for their little one from the very beginning, thinking carefully about how to save and invest for their future from an early age makes a real difference over time. Understanding the tax rules around children's savings, as Martin highlights, means money set aside for a child can grow as efficiently as possible."
