It’s important to get children into the habit of saving and teach them about the value of money. It’s never too early to start, but a child usually has to be at least seven years old to open an account in their own name. Some banks and individual accounts require the child to be 11 and there are also ‘teenager accounts’ that can typically be opened at 16.
If you want to open an account on your child’s behalf, you can do this at any age. Many parents differentiate between an account they pay into to save for a child’s future and the child’s own bank account where they can deposit and save their own money.
An account in the child’s own name, where they can invest gifts, birthday cash or regular spending money, can really help them feel connected to the process of saving.
Types of children’s accounts
Just as with adult accounts, there are different kinds of children’s accounts. When looking for a child bank accountthe best one will often depend on how you want your child to save and use their money. It can often be useful and gratifying for the child to have different goals. One ‘pot’ can be used for long-term saving and another can be used to save for specific goals – a new video game for example.
Easy-access children’s savings accounts can be great for ‘saving for spending’ plans, but will typically pay a lower rate of interest while the kids save. Notice child accounts offer higher rates, but require you to give notice of a month or more before making any withdrawals. Term accounts, meanwhile, usually give the highest rates of interest if you don’t make any withdrawals during the term – generally one, two or three years.
Amount of tax
There’s a common misconception that kids don’t pay tax on the interest earned in child saving accounts. They actually pay the same tax as adults but most children don’t earn more than the tax threshold in any given year. For 2013-2014 the tax threshold is £9,440 and any earnings below this are not taxed.
Your kids may also qualify for a junior ISA. These are savings accounts that allow you or your child to invest up to £3,720 each tax year. The whole pot is tax free (for cash ISAs) or tax efficient (for investment ISAs) until their 18th birthday.