Children’s savings could be costing parents over £6,000 in tax

As 2007 draws to a close, Nationwide Building Society calls on the Government to bring about tax reform on children’s savings in 2008. The Society reveals that parents who regularly pay money into their child’s savings account could be faced with a tax bill of more than £6,000 over 18 years.

The tax problem is compounded because of the inequality between those children that have Child Trust Funds (CTF) and those that don’t. The first batch of CTF babies turned five in September this year and their parents can save up to £1,200 every year for 18 years tax-free. There are approximately 10 million children in the UK who are too old to qualify for a Child Trust Fund (CTF) and too young to invest in an ISA and are therefore denied the opportunity to save a tax-free lump sum of this size. If children’s parents are saving regularly on their behalf then the parents will become liable for income tax on the interest earned from their children’s savings once the income in any tax year exceeds £100. This means that a parent saving £100 a month (the maximum monthly savings deposit allowed on a CTF) for their child could have to start paying income tax on the interest within two years.

The two-tier savings regime may also deter parents from contributing any additional savings to a CTF if they have an older child who does not qualify, as it would seem unfair to treat the children differently.

Figures from the Society show that children in the UK are becoming wealthier, with balances in children’s savings accounts increasing by over 90% in the last six years. And, with Christmas just a few weeks away, this figure is set to increase as many children receive gifts of money.

Matthew Carter, director for savings at Nationwide, says: “We are encouraged by the Government’s commitment to Child Trust Funds, however they are ignoring 10 million other children who are not eligible by not addressing this tax inequality. Having seen children’s savings balances increase by over 90% in the last six years, and with the average interest payment on children’s accounts at £92 this year, children and their parents are saving more and could find they will have to start paying tax on the interest earned. The Government should acknowledge this, by allowing non-CTF children the opportunity to save as much as their eligible counterparts in their non-CTF savings accounts.

“We called on the Government in this year’s Pre-Budget Report to make changes to the child savings tax system and we will call on them again in next year’s Budget as we believe they should do everything they can to equalise the tax treatment for all child savers.”