Updated 6/1/12

Banks, building societies and even the Post Office are all vying for your children’s cash. Why? Because people often stick with the bank they used as a child, so banks will offer all sorts of incentives to get your children’s business whilst they are still young. But from your point of view, opening an account for your child is a great opportunity to get them thinking about money (and a tax-efficient way of investing for their futures).

• Why open a children’s savings account?
• The different types of account
• How to make the most of your child’s tax allowance
• Setting it up
• Which ones are the best?

Why open a children’s savings account?

There are three main reasons for opening a children’s savings account:

• They let your kids transform their coppers into real money that they can earn interest on. It’s an effective way of getting them to understand the value of saving.
• They are tax-free on all interest earned up to £7,475 in 2011/12.
• You can (up to a point) use your child’s tax-free allowance as an efficient, high interest haven for your money. We discuss that here.

Who can access the money of a children’s savings account?

The terms and conditions can vary (so do check), but most children’s accounts follow the guidelines below:

• Bank accounts for under-eights require a parent or guardian as signatory.
• Bank accounts for eight to 12-year-olds, where the children themselves can make deposits and withdrawals with their own passbooks.
• Bank accounts for 13 to 18-year-olds are similar to the adult versions, with cash point cards and cheque books for over-16s. But there are no overdrafts for under-18s.

However most children’s accounts give adults the option to be in full control of the account until the child is 16 if they wish.

How to make the most of your child’s tax allowance

It may sound a bit mercenary, but there’s nothing wrong with using your child’s tax free allowance as a sensible outlet for your money. (There’s no reason you couldn’t set up two accounts: one for your child’s pocket money, and one for more serious savings).

Kids have the same £7,475 a year tax allowance as adults – so you may as well use it.

The interest your child earns on this money is tax free up to £100 per parent. You can therefore give your child as much money as you want - but after the sum earns £100 interest, it will be taxed at the same rate you pay.

If both parents contribute equally to the savings pot, the child can earn interest up to £200 (£100 per parent) without paying tax on it.

If the child has step-parents, there is a seperate £100 limit for them too.

Grandparents, carers and friends of the family can gift as much money as they like to your child and the interest won’t be taxed as your income. However, your son or daughter may have to pay tax on the income of their savings if the gift takes them over the £7,475 threshold. (They may also  have to pay Inheritance Tax on it as well if the donor dies within seven years of making the gift).

For more information on your child’s tax allowance, see Directgov.

How do I set one up?

When setting up children’s bank accounts there are a few points to consider:

• Firstly, as with any other account, it makes sense to shop around because the interest rates and incentives vary significantly. Luckily we’ve gathered the best deals together for you below!
• As well as looking at the interest rates, you should also check how often interest is paid into the account – most pay on an annual basis, which could seem like forever to a child.
• There are lots of freebies to be had when you open child accounts, which can be tempting for your child; but explain to them the value of interest rates. All other things being equal, though, go for the best freebies!
• Consider the location of the bank. Some internet accounts offer better interest, but if your child wants to be able to use their passbook and draw out cash, then they’ll need a local branch.

Once you’ve chosen, all you’ll need to open the account is your identification, your child’s identification and the minimum deposit. Acceptable ID is a passport, birth certificate or NHS medical card. You can usually have one account per adult, per child so if you are married, both you and your partner can open an account on behalf of your child.

You then have to complete the Form R85 from the Inland Revenue to make sure that your child’s savings remain tax free.

For more information on setting up savings accounts for children, see Directgov.

Best deals

Best regular account (requires you to put a regular amount of money into the account each month, in return for a higher rate of interest)

The best interest rate on the market by far is the Halifax Children’s Regular Saver.

It boasts a very impressive 6% AER rate of interest. There are certain conditions though:

• You have to make a mandatory monthly deposit of between £10-£100 (if you miss one, your rate will fall).
• The whopping 6% rate is only guaranteed for one year, after which your child’s money will be transferred into another Halifax account (chances are it will have a far lower rate of interest, so look around at what other accounts are offering when your 12 months are up).
• You can only pay in a maximum of £1,200 in that first year.

Magpie tip: Although you can only pay in a maximum £1,200 that year, any individual adult can set up one of these Halifax accounts in trust for a child. In other words, you could set up one account and your partner could set up another (thus allowing you to pay in twice as much money – £2,400 - that will benefit from a 6% interest rate).

Best fixed rate accounts  (these guarantee a fixed rate of interest for a set period – but you can’t take your money out during this time.)

Clydesdale Bank Child’s Savings Bond offers 4.25% over 5 years. You can only make one deposit (between £50 and £250,000) and then that’s it – you can’t put in any more money over those five years. You also won’t be able make any withdrawals until that time period’s up, either. It is only available for children up to the age of 16.

Bear in mind that if you go for a fixed rate account you lose the flexibility to move your money to a higher paying option if interest rates rise. As the Bank of England base rate is at an all-time low, it’s quite likely it will rise at some point over the next five years (the length of this bond).

If you want to fix for a shorter time then Northern Rock’s Little Rock Fixed Rate Bond (Issue 6) pays 3.3% AER for 3 years - so only tying up your money until 2015. The minimum initial deposit is £1 and you can save up to £20,000, though no withdrawals are allowed. (Northern Rock offer a more flexible eaasy access account with only slightly lower interest however – see below).

Best easy access account (these let your kids access their money whenever they need it – however, the interest rates on these are variable, so you need to keep an eye on them in case they suddenly tumble downwards).

Northern Rock comes up trumps again, with their Little Rock Access (Issue 2) account paying 3% AER on savings between £1-£10,000 for under-16s.

Useful Links

• HM Revenue & Customs’ taxback pages
• Direct Gov