Children may have their own income. This may be in the form of savings income on accounts that they hold or, for older children, income from a paper round or a Saturday job. Like adults, children have their own set of allowances, including a personal allowance and savings and dividend allowances. However, anti-avoidance provisions apply to prevent parents effectively using their children’s tax-free allowances to reduce the tax that they pay.

Earned income

For tax purposes, the same rules apply to income earned by children as apply to adults. Children have their own personal allowance, and income sheltered by the allowance will be tax-free. Where a child has trading income, for example, selling items on eBay, they too will benefit from the £1,000 trading allowance. However, a child under the age of 16 is not liable to pay National Insurance contributions.

Savings income

Unless it is significant, it is unlikely that a child will need to pay tax on their savings income. The same rules apply as apply to adults, and their savings income will be tax-free where it is sheltered by the savings allowance, the personal allowance and, where available, the savings starting rate band.

The exception to this rule is where the child receives interest of more than £100 on income given to them by a parent. At an interest rate of 5%, this would be the case where the child has received income of £2,000 or more from their parent. Where a child receives interest of more than £100 on money given to them by a parent, the interest is treated as that of the parent rather than of the child, and to the extent that it is not sheltered by the savings allowance or any unused personal allowance, it will be taxed at the parent’s marginal rate of tax. The gift from the parent is treated as constituting a settlement. It is important to keep an eye on the interest received – rising interest rates may take the annual interest, previously less than £100, over the £100 limit, triggering the anti-avoidance rules.

This rule does not apply to money given to a child by grandparents, other relatives or friends – the income is taxed as that of the child, regardless of the amount.

You may also like to read: Do you now need to pay tax on your dividend income?

Example

Hannah is 11. Her mother Louise inherits some money and puts £10,000 into an account for Hannah. Interest is paid at the rate of 5% per annum – a total of £500 a year. As the interest exceeds £100 a year, it is taxed as Louise’s rather than as Hannah’s, and if Louise has used up her personal and savings allowances, she will pay tax on it at her marginal rate of tax.

Hamish is also 11. His grandfather downsizes and from the cash released from the sale of his home puts £10,000 in an account for Hamish, on which interest is paid at the rate of 5% per annum, earning Hamish £500 a year. However, in this case, the money is treated as Hamish’s and, as it is covered by his personal savings allowance, it is tax-free.

To overcome the tax trap where the money is given by a parent, consideration could be given to investing in a Junior ISA. Parents or guardians with parental responsibility can open a Junior ISA, but the money in the account belongs to the child. There are two sorts of Junior ISA – a cash ISA and a stocks and shares ISA. A child can only have one of each. Money can be added to the account(s) each year up to the Junior ISA limit, set at £9,000 for 2024/25. The limit applies across both types of account rather than per account. Income earned on money in a Junior ISA is tax-free, as are dividends on stocks and shares in a stocks and shares Junior ISA.

Partner note: ITTOIA 2005, ss. 629, 783A; ITA 2007, ss. 7, 7A, 12A, 12B, 35; the Individual Savings Account Regulations 1998 (SI 1998/1870).