When is a Child’s Income Taxable on Their Parent?
As a parent, you might wonder when your child’s income becomes your responsibility for tax purposes. It’s a good question, especially since children, like adults, have their own tax allowances. Whether it’s pocket money from a weekend job or interest from savings, understanding when your child’s income might affect your tax bill is crucial.
Earned Income: The Basics
When it comes to earned income, children are treated just like adults. They have a personal allowance, which means income up to this allowance is tax-free. For example, if your child earns money from a paper round or even from selling items on eBay, they benefit from the same tax rules as you do. Additionally, they can take advantage of the £1,000 trading allowance. However, it’s worth noting that children under 16 don’t pay National Insurance contributions.
Savings Income: A Potential Tax Trap
Most of the time, your child’s savings income won’t be taxed, as it’s usually covered by their personal allowance and savings allowances. But there’s an important exception to this rule, and it’s one that can catch parents off guard.
If your child earns more than £100 in interest from money you’ve given them, that interest will be taxed as your income, not theirs. This anti-avoidance rule is designed to stop parents from using their child’s tax-free allowances to reduce their own tax liability. For instance, if you give your child £2,000 and it earns 5% interest annually (£100 or more), that interest is considered your income, and it could push you into a higher tax bracket or increase your tax bill.
It’s essential to keep an eye on this, especially with rising interest rates. A gift that was previously below the £100 threshold might suddenly cross it, triggering this tax rule.
Gifts from Others: A Loophole?
Interestingly, this £100 rule doesn’t apply if the money comes from someone other than the parents. For example, if grandparents, aunts, uncles, or family friends gift money to your child, the interest earned is taxed as the child’s income, regardless of the amount. This can be a useful way to help build your child’s savings without impacting your own tax bill.
Example: Lawrence and Lucy
Let’s consider two examples to clarify this:
- Lucy, aged 12: Her mother, Louise, places £10,000 in an account for her. At a 5% interest rate, this account earns £500 per year. Because the interest exceeds £100, it’s treated as Louise’s income, and if Louise has already used up her personal and savings allowances, she’ll have to pay tax on it at her marginal rate.
- Lawrence, also aged 12: His grandfather gifts him £10,000. This money also earns 5% interest per year, or £500. However, because the gift is from his grandfather and not his parents, the income is considered Hamish’s, and as it’s within his personal savings allowance, it’s completely tax-free.
Consider a Junior ISA: A Tax-Free Solution
If you’re worried about falling into this tax trap, a Junior ISA might be the perfect solution. Parents or guardians can open a Junior ISA, but the money belongs to the child. There are two types: a cash ISA and a stocks and shares ISA, and your child can have one of each. The annual limit for contributions is £9,000 for 2024/25, which applies across both types of Junior ISA. Crucially, income and dividends earned within a Junior ISA are tax-free, providing a great way to save for your child’s future without any tax worries.
Need More Guidance?
Navigating the complexities of tax and savings can be tricky, especially when it comes to your children. If you’re unsure about how these rules might affect you or want to explore tax-efficient ways to save for your child’s future, get in touch with Jon Davies Accountants. Our friendly, expert team is here to help you make the best financial decisions for your family. Contact us today to learn more!
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