Children can earn up to 6% in the top savings accounts - yet many have cash in dismally-paying accounts. That doesn't just deprive them of interest, but the chance to learn the valuable lesson that your money can work for you.
This is a full guide to the top-paying children's savings accounts, how tax for kids works, grabbing freebies and how to use their tax-free allowance for your gain.
Best buys
In this guide
Tips on teaching kids to save
The simple money lesson for younger children is obvious - put your cash in the bank and it'll grow. Yet as they get older there's another valuable lesson to be learned. A bank's job is to make money from you - our job is to try to keep our cash.
This may sound like a tough message to teach kids, but it's crucially important. The banks would like us to say "put your money in the bank", not "it's which bank you put your cash in that counts". So here's some top tips for helping kids learn and understand about saving.
Should your kids be getting a junior ISA/Child Trust Fund instead?
It depends - mostly on whether your kids pay tax now (most don't), and whether they will save enough to pay tax on their savings when they're 18.
If you think they'll save more than �5,760 (the current ISA limit) in their first 18 years, then it's worth getting a junior ISA, as these convert to full cash ISAs when the child turns 18.
The other consideration for whether you should choose a normal kids' savings account or a junior ISA is how much you'll give them. Because if they'll earn more than �100 interest a year from money given from each parent, that cash will be taxed at your rate, unless it's in a tax-free junior ISA.
See the Junior ISA and Child Trust Fund guides for more info on whether they're right for you and for best buy accounts, or see Do kids pay tax? below to help you decide.
Explain the difference between real banks and piggy banks
Here's a handy simple explanation: "Put your cash in a piggy bank and it sits there. But put it in a real bank and you're actually lending them your money - so they need to pay you for it.
"The amount you're paid is called interest. The higher the interest on savings and the longer you keep it with them, the more they are paying you. If the interest is 10%, that means they pay you 10p a year for every pound you save with them."
Pick the account together - so they can help decide
Look through the best buys together, explaining accounts pros and cons (if you're unsure, see Interest Rates For Beginners and make the decision together). Better still, go to your local bank or building society, get your child to ask for an account there and compare its deal with the best here.
Don't be swayed by cute toy freebies
Explain that many banks try to tempt you in with freebies, but often they're the ones that don't pay good interest. So pick an account for interest, then discuss opening other accounts with just the minimum balance to grab the freebies (see best freebies).
Get them to monitor the rate - so they're involved
If you go for an easy access or variable rate deal, put your child in charge of checking the interest every month to see if it's still paying a decent rate. Move it if not.
Help them pick an account where their savings are safe
It's an interesting discussion to have with children. There's a balance here. A piggy bank is kept at home where you can see it, though it can be stolen (don't say that if it'll scare them). Yet money in the bank is safe and earns interest, but there's a very slight risk the bank may collapse.
If it does, provided it's a UK-regulated account (all those listed below are) the money is protected up to �85,000 per person by the Government (see the Safe Savings guide) which is as safe as we can hope for.
Agree with them how much of their pocket money'll be saved
One easy trick is to defer an element of pocket money to show the extra reward from savings. For example, if their pocket money is �3, give them half for spending and half for saving. Then tell them for every pound they save, you'll give them an extra one at the end of the year as a reward. For more pocket money tips see Martin's blog: Give pocket money as pay.
If you need further help - or they want to read more
These tips are just the start. For more, see the Free Teen Cash Class PDF, Martin's MoneySaving tips for nine-year-olds blog (and ensuing discussion) plus the Things teens need to know about cash discussion and the full Financial Education Campaign section. You should also check you're with the best Child Trust Fund and now, the best Junior ISA, available for those born before 1 September 2002 and after 3 January 2011.
Do children pay tax on savings?
There's a common myth that children don't pay tax - that's simply not true. In fact, they're taxed in exactly the same way as adults. Each child can, in the 2013-14 tax year, earn up to �9,440 tax-free from salary, savings or investments.
The difference is, unlike most adults, most children don't use up their allowance, so their savings interest is tax-free.
Assuming your child won't earn more than �9,440 (watch out child prodigies!), ensure any interest is paid without tax being automatically deducted by filling out the Inland Revenue's R85 form (the bank should give you one of these).
If you've already overpaid, you'll need to fill out an R40 form to get it back.
Special rules for money from parents
However, any interest earned on money specifically given to them by a parent is only tax-free up to �100 interest, per parent or step-parent, each year. If your child earns more than �100, the whole lot is taxed at the parent's rate.
If parents intend to save these levels of cash in a child's name, it's definitely worth considering junior ISAs, where the interest is tax-free regardless - but still ensure you're getting a top rate.
Is your child eligible for a junior ISA or Child Trust Fund?
It's also worth looking at tax-free junior ISAs or Child Trust Funds. Your child will be eligible for one or the other depending on when they were born. Although it's unlikely your child will have to pay tax, there are benefits to both options. See the Junior ISA and Child Trust Fund guides to see which your child is eligible for.
Can a grandparent open an account for a grandchild living abroad, in the child's name?
In theory, yes - HMRC says there's nothing legally stopping you. However in practice, many banks - including those detailed here - require the named account holder to have UK residency as part of their T&Cs;, which will make it difficult.
Ultimately, you may want to keep the money in your name. If you're not a taxpayer, that shouldn't be a problem. Otherwise, it would be tax-free in a�cash ISA�- and it could stay there until you're ready to hand the cash over.
The only thing to watch for is inheritance tax, if you have substantial wealth. But assuming this isn't too large a sum of money, you should be able to give it away in the future without too many problems.
Top kids' savings accounts
A wide range of account types are on offer, all paying different interest rates in a variety of ways. Below we've listed all of our top picks, in the order to consider them. Not every account suits everyone though, so be sure you understand 'em and are happy before picking.
Plus as noted above, make sure you take junior ISAs and Child Trust Funds into consideration too, as they may fit you well.
Best buys: Children's regular savings
Regular savings accounts require you to put a minimum amount of money away each month. In return, they often pay much more interest - and at present, the top pick's interest smashes all other best buys.
If you miss a month or need to withdraw cash you'll often lose the rate, so only consider this if you're sure you'll be able to pay cash in during the time period. For a more detailed explanation of how the interest works and pros and cons, read the full adults' Regular Savings guide.
Halifax Regular Saver 6% AER Earn high interest if you can save regularly.
Only available in Halifax branches.
- Rate: 6% AER fixed for 12 months
- Monthly deposit: �10-�100
- Withdrawals allowed?: No
- Missed payments allowed?: Yes
- Access: Halifax branches only
- Min age: 0
- Max age: 15
The Halifax Kids' Regular Saver pays a whopping 6% AER, fixed for a year. However, you can only pay in �10-�100/mth and no withdrawals are allowed, but you can miss monthly deposits. You can only get it in Halifax branches though - not via any other means, nor via Bank of Scotland.
As the 6% rate only lasts a year, the max pay-in is �1,200 - but at least the rate you're getting is huge. After a year, all the money is transferred to a Halifax Young Saver account (see below) - if its rate's no good then, ditch and switch.
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Best buys: Children's easy access savings
If you don't fancy the regular savers, or have filled them, next best is a choice between...
- The top easy access children's savings accounts, where rates can change both with the Bank of England's base rate and as providers change their competitive stance, or...
- The top fixed savings, which give a guaranteed rate for a set period, but you can't take your money out during that time. These can be great for certainty on your return, but are only suitable if you're happy to lock cash away for the entire term.
We've plumped for the top easy access deals next as rates are slightly better, but go with whichever suits you best. All the accounts below have postal access - for something you can operate online, rates are terrible, so check top-paying adult accounts, and the top junior ISAs.
Halifax/Bank of Scotland 3% AER Top rate, unlimited withdrawals. Branch only.
- Rate: 3% AER variable
- Min deposit: �1
- Max deposit: �20,000
- Min age: 0
- Max age: 15
- Access: Branch only
The Halifax or Bank of Scotland Young Saver account pays 3% AER without any bonuses.
It allows unlimited withdrawals and can be opened and accessed in branches by an adult trustee. Make sure you fill out an R85 form to not pay tax on the interest.
Halifax and Bank of Scotland share one lot of �85,000 UK saving safety guarantee with the AA, BM Savings and Saga. Read the Safe Savings guide for full details.
Skipton BS 2.75% AER Min �1, unlimited withdrawals. Branch/post only
- Rate: 2.75% AER variable
- Min deposit: �1
- Max deposit: �50,000
- Min age: 0
- Max age: 17
- Access: Post or branch
The Skipton BS Leap Account (issue 2) is the top easy access account, paying 2.75% AER on balances from �1 to �50,000, including a 0.5% bonus for a year. In addition, for every �20 saved in branches you'll receive a sticker to collect towards a choice of book.
It's available for those up to age 17 but for under-eights, an adult trustee will be needed to open and operate the account. This can be done in branch or by post.
Lloyds TSB 3% AER Available to current account customers only
- Rate: 3% AER variable
- Min deposit: �1
- Max deposit: �20,000
- Min age: 0
- Max age: 16
- Access: Branch
Lloyds TSB current account customers can open the branch-access Young Savers account on behalf of a child, paying 3% on balances over �1. You'll maintain full responsibility for it until the child reaches 16. It'll then revert to a Lloyds Easy Saver.
The Lloyds Classic Account, its only bank account without a monthly fee, is a decent option, currently paying up to 4% in-credit interest if you pay in �1,000/month. However, it doesn't have to be used as your main account to get the Young Saver.
HSBC 3% AER For 7-17 year olds. HSBC Premier account customers only
- Rate: 3% AER variable
- Min deposit: �10
- Max deposit: �20,000
- Min age:7
- Max age: 17
- Access: Branch or phone
HSBC Premier account customers' children aged 7 to 17 can open the Premier MySavings account, paying 3% AER on balances over �10 and up to �3,000. The standard MySavings account pays 1% AER up to �3,000. For balances above this, both accounts pay 0.5% AER.
The account can be opened and operated by the child but for under-11s, permission from an adult trustee is required to withdraw more than �50. For over-11s, you'll also get a current account with a Visa debit card - this account can be managed online.
For existing HSBC Premier account holders, this is a good option but it's not worth opening the account just to get the children's savings benefits.
Best buys: Children's fixed savings
The longer you fix for, the more you are RISKING the fact that an unpredictable future means this could be a bad choice. If interest rates were to increase rapidly, you would lose the flexibility to ditch and switch to a better payer.
NS&I; 2.5% AER fixedBranch, phone or post
- Rate: 2.5% AER fixed for 5 years
- Min deposit: �25
- Max deposit: �3,000
- Min age: 0
- Max age: 16
The NS&I; Children's Bond (issue 35) pays 2.5% AER for five years on balances from �25 to �3,000. Withdrawals aren't allowed but you can close the account early, subject to a 90-day interest penalty.
The account can be opened online, by phone or post by parents, guardians or (great-) grandparents only.
Check your local building society too
Local building societies often pay very decent rates too. Check for offers for existing customers' children or for those living in the local area.
For a full list of children's savings accounts use the MoneySupermarket* and Moneyfacts comparisons, in conjunction with the Savings Safety guide to examine the protection for any accounts. However, with these it's crucial you double-check the rates on the banks' own websites before applying, as the comparison tables are NOT continually updated.
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The top children's savings freebies
Banks aren't stupid beasts. They know many people stick with their childhood bank throughout their adult life. So doling out a piggy bank or calculator is a cheap way to bag 20, 30 or even 40 years of custom.
Therefore, unless you're only putting in a small amount of money - so the freebie value outweighs anything else - you'll do far better to focus on interest. But once you've set up the best-paying children's account, you can do your kids a great service by teaching them a bit of banking disloyalty.
There's nothing stopping a child opening a range of accounts with the minimum deposit, usually �1, and grabbing a freebie for each. Just make sure you keep track of them.
Current children's freebies | ||
---|---|---|
Bank/society | Account name | Gifts or incentives |
Co-op | Bonus Account | Educational gifts from Born Free Foundation |
Earl Shilton BS | Early Saver | Piggy bank |
Holmesdale BS | Young Saver | Savings box, Ducti wallet or �15 gift card |
Lloyds TSB | Young Savers | Stanley money box |
Please note some building societies require you to be a local resident. Last updated: January 2013 |
Use your child's tax-free allowance
'Using your children tax-efficiently' sounds slightly callous. But if you are better off, so are your kids. Saving money in a child's name means it's tax-free, and often at a higher rate of interest. It's perfectly possible to have one account for your child to put their pocket money in, and another for any larger amounts.
Know the tax implications
If it's their own money, children can earn the same �9,440 a year in interest as adults can before it gets taxed. However, don't assume you can dunk fortunes in your kid's name.
If a child generates more than �100 interest in the course of the year, from money specifically given by each parent (or step-parent), this income is taxed at that parent's tax rate. So that's �200 for a couple with a child.
In practical terms this means you could put up to �6,600 in the 3% top paying children's account (�3,300 per parent), and it wouldn't be taxed, as that would generate around �99 each. Just to clarify, this doesn't mean �6,600 every year; it's the interest generated from all cash given in this and previous years.
One way around this is with junior ISAs, where �3,720 (in 2013/14) can be saved in the child's name and is free of tax regardless - read our full Junior ISA guide.
Also these rules only apply to parents, not grandparents, aunties, uncles or friends. They may all give your children as much as they like and, providing it's a genuine gift, it counts as the child's money without a �100 limit.
The only other tax implications of making cash gifts is the possible spectre of inheritance tax if the donor dies within seven years of making it.
A quick warning for those bright sparks thinking: "If I gave my brother's kids �10,000 and he gave mine the same...?" Good thought, but no cigar. If the Inland Revenue spots you, you're in trouble.
Whose money is it anyway?
It's worth remembering if the money's in your child's name, it's your child's cash. Yet if you're worried that by putting �1,000 in their name they'll splash out on 52 ringtones, an Xbox and enough sweets to give a junior school a sugar rush, don't be. Many accounts will allow the adult to stay in control of the cash.
Most banks require a child to be at least seven before they can open an account for themselves, though they do all differ, so it's always worth checking the specifics. Under-sevens require a parent, guardian or grandparent to set up an account and act as signatory.
This method can also be selected for older children. If it is, then usually until they're 16 the signatory can still manage and withdraw the cash without the child's approval. Do note many accounts have terms and conditions stating withdrawn money must be used "for the benefit of the child," but of course, this encompasses a wide variety of definitions.
The size of the saving
For calculating the interest on children's savings, make sure you select the 'no tax' option below.