Parents could be “sleepwalking” into a surprise tax bill on their children’s savings, AJ Bell has warned.
A fifth of parents believe their child’s Junior Isa is tax free, while the same number thought interest on their child’s savings account was tax free.
Laura Suter, director of personal finance at AJ Bell, said: “Parents are unknowingly sleepwalking into a surprise tax bill as they aren’t aware they could be taxed for their children’s savings.
“Half of parents had no idea how tax worked when it came to the interest earned on their children’s savings.”
Once a child earns £100 or more on their savings account on money that was gifted by parents, it is taxed as though it is the parent’s money.
Suter added that parents have generally not had to worry about this tax rule while interest rates were low but could face a tax bill with increased rates.
She added the top children’s easy-access account currently pays 5.25 per cent, meaning the limit would be hit at £1,900.
Suter said this lack of understanding extended to the rules around Junior Isas.
“While just over two-fifths of parents correctly identified that all the interest on savings in a Junior Isa is tax free, another two-fifths admitted they don’t know how tax works on the accounts,” she said.
“One in 10 parents thought that the savings interest in a Junior Isa would be taxed over a certain limit, while 2 per cent believed all of the interest in a Junior Isa was taxed.
“This lack of understanding once again highlights the need for Isa simplification, as the large number of accounts and complexity involved clearly presents a barrier for savers to fully understand the accounts.”
Suter repeated AJ Bell’s calls for long-term Isa simplification.
As the £100 limit is per parent per child, Suter said savers could get around the rules by two parents with separate accounts gifting money to their children.
She added getting friends and family to contribute to a child’s savings is another way around this.
“The other option is using Isas, as interest earned on Isa accounts isn’t taxable,” added Suter.
“Alternatively, you could consider investing. Lots of money saved for children sits in cash accounts, but really if you’re saving for 10, 15 or even 18 years that’s an ideal time horizon for investing.”
AJ Bell carried out the survey of 2,000 UK adults last month.
tara.o'connor@ft.com
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