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• Junior ISAs

Junior Cash ISAs

Tax-Efficient Savings for Children

 

Junior cash ISAs are a great way to build up tax-free savings for your child or grandchild.

 

James Caldwell, Director

Junior Cash ISAs

Junior cash ISAs offer each eligible child a tax-free savings account into which parents, family or friends can contribute funds to help save for the child's future. Junior ISAs first become available in November 2011 to replace the now-defunct Child Trust Fund, which means children who were born during the period in which Child Trust Funds were in operation are not eligible for junior ISAs. A junior cash ISA can be opened by the child's parent or legal guardian. Once the child reaches 16, they'll be able to manage their own account. However, they won't be able to withdraw funds until they reach the age of 18.

In terms of rules and regulations, junior cash ISAs operate on a similar principle to regular cash ISAs. It's permissible to switch providers, but only one junior cash ISA can be held by each child at a time. Unlike Child Trust Funds, junior ISAs don't involve any Government contribution. The 2013/14 tax year allowance for junior ISAs is £3,720. This allowance can either be put into a junior cash ISA or divided between a junior stocks and shares ISA and a junior cash ISA in whatever proportion you wish.

The advantages of a junior cash ISA…

• It's an easy and convenient way to save tax-free for your child's future.
• Unlike many savings accounts, the money saved in a junior cash ISA stays tax-free once the child reaches adulthood. If the child decides to keep the cash in the account once they reach 18, it will automatically be converted to a regular ISA.
• Any adult can pay money into the account - family friends, grandparents, godparents, aunts and uncles can all contribute - making a junior cash ISA an ideal way to save up money given on birthdays and other special occasions without the child being tempted to spend it.
• The money is locked away until the child turns 18 and cannot be released by either parents or children until this point - a bit like a pension fund. This can be advantageous as it means the child can't blow all their savings on clothes or holidays once they hit the teenage years - and parents won't be tempted to dip in either.
• If you are in a financial position to make savings on behalf of your child that generate more than £100 per year in interest, this interest will be liable to taxation. If this scenario applies, a junior ISA may be a good way to make sure your child gets the most from their tax-free savings allowance each year.

Things to consider before opening a junior cash ISA…

• Everyone in the UK under 65 is permitted an annual earnings allowance before they're required to pay any income tax. In 2013/14 this is £9.440. Unless your child is exceptionally high-earning in their own right or receives savings contributions that generate interest of over £100 per year (see above), it's unlikely they'll be exceeding this figure. Most children can therefore earn tax-free interest on money set aside for them in any savings plan, as long as the parent opening it on their behalf fills out an R85 form when the account is set up.
• Once your child reaches 18, the money is theirs - so you may find the lump sum that you envisioned being used as a mortgage deposit is instead spent on designer clothes. There's nothing you can do about this in legal terms - it's their money. If you're concerned about this possibility and want to ensure the money is only used for a specific purpose, you might want to save in your name instead.
• The money is locked away for the entire time your child is a minor - so if you suddenly hit financial difficulties as a family, you can't access it to use as an emergency fund. Think carefully about whether you can afford to leave cash untouched until your child turns 18, and only put away what you can afford.