Banks and building societies often offer accounts at advantageous rates to young people, to encourage saving. Some give away free gifts, such as money boxes or stickers but, as with all accounts, look at the interest rate when you make your choice. Watching their money grow is a valuable way for the child to learn how interest works.

Many building societies won’t let the over-16s have children’s accounts, but one or two will let young people continue to save. These accounts can be particularly useful for students and young people saving to go to college.

Children and young people are liable to pay tax in the same way that adults are. However, in most cases their income will be well below the tax-free allowance that everyone has before they pay income tax. If the only income that your child has is the interest from a savings account, he or she should be able to register to have the income paid tax-free. Ask the bank or building society for form R85 to get this done.

Note that, if the child’s money has been given by a parent, and if the interest in all the child’s accounts (if there is more than one account in the child’s name) totals more than £100 in any one tax year, the interest is taxable as if it were the parent’s income, at the parent’s highest marginal rate. This rule applies only if the money in the child’s account has been given by a parent, and does not apply to gifts from friends, grandparents or other relatives.

Child Trust Fund

All children born after September 2002 receive a £250 voucher to be put into a special account, which they can access when they are 18. They receive a further £250 when they are seven years old. Parents and friends can add to the account up to a maximum of £1,200 per year. The fund grows free of income tax. The Government is keen for parents to invest their CTF money in a stocks and shares account because of the greater opportunity for the money to grow, and there are a variety of accounts available from banks and building societies and independent providers.

However, many parents prefer to keep their savings in cash, and CTF cash savings accounts are available from most banks and building societies. Some building societies, which deal principally in cash accounts, have teamed up with other companies to provide a stocks and shares product as well as their own cash account.

CashQuestions Guide to Savings Accounts  

CashQuestions Guide to Tax-Free Savings 

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