Home Business NewsBusiness The sneaky tax trap hitting your children’s savings

The sneaky tax trap hitting your children’s savings

by LLB Reporter
7th Mar 23 10:42 am

Parents could be hit with a tax bill once child’s savings interest reaches £100, new research has found.

A total of £20,000 of savings could land parents with a £320 tax bill.

Laura Suter, head of personal finance at AJ Bell, comments: “Parents who diligently save money for their children wouldn’t expect to be hit with a tax bill, but a little-known rule means the taxman could take some of the interest from their child’s savings. Once a child earns £100 or more in interest on their savings account on money that’s been gifted by parents, it’s taxed as though it’s the parent’s money.

“Parents haven’t had to worry about this little-known tax rule while savings rates have been abysmally low, but now they are creeping up they could find HMRC comes calling for unpaid tax. For example, the top children’s easy-access account pays 4%, which means that once you have more than £2,500 saved you’ll hit that £100 limit. If you opt for a fixed-rate account you can earn even more, with the top two-year fixed rate kids account paying 4.4%* – meaning that once savings reach £2,250 you’ll hit that £100 limit.

“If you reach £100 then all of that interest (not just the interest over £100) is counted as though it’s the parent’s and will count towards their Personal Savings Allowance (PSA). The PSA means that basic-rate taxpayers can earn £1,000 in savings income before they pay tax on it, while higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers have no allowance. If your savings interest plus your child’s is still within your PSA then you’ll have no tax to pay. But if you’ve already used up the allowance (or your child’s savings tips you over) then you’ll have to pay tax on that money, at your income tax rate.

“It’s annoying that parents who have diligently saved for their children might find their good deed has a tax sting at the end of it. The limit is intended to stop parents funnelling their savings into accounts under their child’s name to avoid tax – but the £100 limit is out of date and should be increased to £500. This would prevent parents being caught out and having to report to HMRC for relatively small sums, but would still act as a barrier to parents trying to tax dodge. For now, there are ways for parents to avoid being hit with the tax rule by organising their savings, using alternative accounts or drafting in grandparents.”

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