Taxation of children

Unsure about whether children need to pay taxes and when? Here's what you need to know.

Basic income

In the UK, the principle is that children are taxed in exactly the same way as adults.

Each year they have a tax free personal allowance (2018/9 – £11,850). Any income above this allowance will be subject to tax based upon various bands. Most children are unlikely to earn in excess of this allowance, so will not be liable for any income tax.

Interest income

Up to 6 April 2016, interest paid on bank savings had a basic rate of tax (20%) deducted by the bank. This is (thankfully) no longer the case and interest is now paid in full.

Currently an individual can earn up to £5,000 of interest, tax free under their starting rate for savers. This allowance is in addition to their Personal Allowance and it decreases as income is earnt over the Personal Allowance. At £16,850 it has dropped to zero.

Additionally an individual can earn up to a further £1,000 of savings income, tax free (again depending on their tax band) under their Personal Savings Allowance. Added up this means that a child can potentially earn up to £17,850 of income from savings without paying tax.

Tax Thresholds for Saving Income
Personal Allowance£11,850
Starting Rate for Savers£5,000
Personal Savings Allowance£1,000

These additional tax allowances become relevant when a child's income exceeds the £11,850 Personal Allowance for the year. As most children will not be earning this amount of income, they won't be relevant. If it is you can click here for more details.

Gifts of money from parents

In the UK, there is no limit on the amount of money that a parent can give their children. However there are 2 possible tax implications that parents should be aware of:

1. Income on monetary gifts from parents

HMRC have a trick to stop parents putting money (and therefore interest) in their children’s name in order to reduce their tax bill.

HMRC will allow children to earn up to £100 of tax free income (e.g. interest income, dividends) from money that came from a parent (£200 for 2 parents). Anything over £100 will taxed at that parent's marginal tax rate, regardless of the child's income tax thresholds.

If your child does or intends to earn a significant amount of interest, one way around this is to open an Junior ISA savings account. However be aware of the limitations and restrictions of the Junior ISAs before going down this path.

These rules do not apply to monetary gifts from other sources (e.g. grandparents).

Click here for more information.

2. Inheritance Tax (IHT) implications

There is a limit of £3,000 per year that can be “given away” without any future Inheritance Tax implication. 

Gifts totalling over £3,000 per year  (the total amount of gifts, not total per person) are potentially subject to inheritance tax. If the estate is worth more that Inheritance tax threshold (currently £325,000 + main residence allowance) then the excess over the £3,000 may be included. If the total value of the estate is less than the threshold there will be no inheritance tax implications.

To assess Inheritance Tax, HMRC will look at a 7 year window to determine whether any gifts that are included in the estate are taxable. Any gift (that is included in the estate calculations) given more than 7 years ago is exempt. Gifts under 3 years ago are taxed as part of the estate (40% tax rate), and gifts between 3 & 7 years will be at a reduced (tapered) rate.

Inheritance tax planning is a tricky and subject to constant change. It is sensible to consult an expert before taking any actions.

Gift exemptions

There is an exemption of the Gift Rule for regular payments, which can be applied to children. If money is given regularly so that it more resembles an income stream, rather than a lump sum, then it may be exempt from inheritance tax. 

The money needs to come from income, rather than savings, and it mustn’t affect the lifestyle of the giver in a material way (i.e. you can’t borrow money in order to make the payments).

For more detail on taxes, consult the HMRC website here.

Last updated: August 2018

Create a grown up account for free
Customise your avatar to get started

Must contain one number, one uppercase & lowercase and 8+ characters.

My children