Another important consideration when starting to put money aside for your child is whose name to put the money in - your name or your child’s name. This decision is bigger than you might think as it impacts a number of things about how the money can be accessed / used. At the highest level, putting money aside in your child’s name generally tends to be more tax efficient but less flexible than putting money aside in your name. For the purpose of this section, when we say “saving” we will mean both “saving & investing”.
The most obvious approach when putting money aside for your children is to put it in their name. The largest benefit tends to be that money in a child’s name is more tax efficient. This is because children have their own tax allowances and products that they’re unlikely to be using, whereas you are more likely to be using up your own allowances already through your salary or your own investments.
The tax allowances are a little complicated but in summary, if the money is gifted from you (the parent) then they’re allowed to earn £100 a year on interest/dividend income before paying any tax or £12,300 profit (e.g from sales of investments) before paying any capital gains tax (current allowances for 2020/21 but may be subject to change in the future).
If they’re likely to earn more than these amounts in the tax year, they also have the ability to use a Junior ISA which, in most cases, is tax-free.
The other thing to bear in mind when saving in your child’s name is the access and control of those funds. As soon as the money is in your child’s name, it becomes legally theirs. This means it can only be used for their benefit (some products such as the JISA don’t allow you to use it at all before the age of 18) and on their 18th birthday the money becomes theirs to do with as they see fit.
Depending on your view, this can be seen as either a benefit or a drawback. On the one hand, it reduces the chances of you dipping into it to buy a new car or complete a house renovation increasing the chances of it growing to a meaningful sum that will really help your child in life. On the other hand, it means that, if they wanted to, they could spend it all on a huge party at the age of 18 (but hopefully we will have educated them well enough throughout their childhood to ensure that this doesn’t happen!)
Putting money aside in your name is the complete reverse of the above. It’s less likely to be as tax efficient but you’ll have more control over how and when the money is used.
It’s likely that you are already using your personal allowance if you’re earning a salary and if you save / invest regularly you could also be using your savings and tax-free dividend allowance. To HMRC, this savings/investment pot is for you and so they will tax it exactly the same way they tax your other assets and earnings.
You could use your ISA allowance if you’re not already using it, but remember you can only contribute to one cash ISA and one stocks & shares ISA per year. This means that you’ll likely need to mix your money with the money you’ve earmarked for your child making it harder to monitor whose money is whose.
As the money is in your name, you have full control of it. This means you can withdraw it whenever you want and spend it however you like.
The flip side of that flexibility is it becomes very easy to dip into the funds at any time and use them for something that’s maybe not as important as your children’s future (like the new Peloton bike). This tends to happen more often when the money is in the same account as your other investments and savings.
When investing, your capital is at risk and may be going up as well as down which means you may be left with less than your initial investment. This article should not be read as personal financial advice. Individual investors should make their own decisions or seek independent advice. Past performance isn’t an indicator of future performance. Please note that tax treatment depends on the individual circumstances or each client and may be subject to changes in the future.
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