Kids needs banking too!

• Types of account for children
• Setting it up
• Which are the best?

Banks, building societies and even the post office are all vying for children’s cash. 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. Opening an account for your child is a great opportunity to get them thinking about money and a useful, tax-efficient way of investing for their futures.

• Child accounts let your kids transform their coppers into real money that they can earn interest on.
  
• Child savings accounts are tax-free on all interest earned up to £5,435.

What kinds of account are there?

There are three main types of child accounts:

• Bank accounts for the under-eights, usually in the name of the parent or guardian.
• 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 that are similar to the adult versions with cash point cards and cheque books for over-16s. However, there are no overdrafts for under-18s.

All three types of account can be tax-free. This isn’t because children do not have to pay tax; like any adult they have an annual personal allowance of £5,435. But because children rarely earn money, they do not use this allowance and so the government have allowed interest earned on savings to be included in this allowance. So, as long as the interest your child earns on their money isn’t more than £5,435 a year, the accounts are tax free.

The rules are slightly different for money you give to your children. 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 as you pay. This does not apply to gifts from relations which are all tax free no matter how much they are.

For more information on setting up savings accounts for children, see HM Revenue & Customs' taxback pages or Direct Gov.


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. For more info have a look at our best deals.
  
• 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; butexplain 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.

Bestdeals

The best interest rate on the market by far is theHalifax Children's Regular Saver:

• 10% AER up to £1,000
  
• But you have to make a mandatory monthly deposit of between £10-£100 (if you miss one your rate will fall to 5.55% AER). 
  
• The rate is only guaranteed for one year, after which your child's money will be transferred into another Halifax account that you decide upon when you open the regular saver.
• You cannot make any withdrawals during the first year.

Because the amount you can put in each month is capped, you cannot accumulate more than £1,200 to make interest on. If you or your child do have more to invest, a lower interest account with no maximum amount would be better.

The next best is the YBS One Day account for children at 5.65% AER. It's available for children up to the age of 20. Access is instant and interest is paid twice annually. Principality Building Society also has a children's account paying 5.6% AER on amounts up to £50,000 with a £1 minimum deposit. Another strong candidate is the Halifax's save4it account at 5.55% AER. The account is for under-16s, minimum deposit is £1, interest is paid annually and you can make as many withdrawals as you like. The Nationwide Smart account for under-17s is also worth a look. The minimum deposit is £1 and it pays 5.52% AER and you get a cash card to give you instant access to your money.

Freebies up for grabs

• With the Halifax's save4it account you get a free calculator, coin bank and save4it card (to open the coin bank)
• The Nationwide Smart account comes with a welcome pack and money-off vouchers for theme parks, days out and more. See the Smart Rewards website.

High interest savings linked to a parent's current account

HSBC is currently offering a high-interest child savings account in conjunction with their Bank Account Plus. As a parent, you can open a Bank Account Plus which for £12.95 a month gives you the preferential rate of 8% AER on balances up to £1,000 in your current account as well as the same rate on balances of up to £1,000 for your child's savings account. You also get other benefits like free family travel insurance and preferential discounts on other HSBC financial products. There's more information about the account on the HSBC website. 

Related Articles

• Child Trust Fund Vouchers
• Saving: Best accounts and how to get started
• Stakeholder pensions for babies

Useful Links

• HM Revenue & Customs’ taxback pages
• Direct Gov