Teaching a child to handle their money might start with a simple piggy bank, but many adults will also choose to make savings or investments on behalf of a child relative.

Setting money aside early on could help with paying school and university fees, or contributing towards milestones like buying their first home.

Whatever your reasons, it's important to be aware of the tax implications that apply to children's savings.

How are children's savings taxed?

Many people assume that children are not liable to pay any tax.

In fact, they are taxed in the same way as adults - the only difference is that most children don't have jobs or earnings to pay tax on.

Just like adults, children can earn income up to the tax-free personal allowance of £11,850 in 2018/19.

They can also benefit from the £5,000 starting rate, which applies to anyone with income under £16,850 in 2018/19.

On top of this, there's the £1,000 personal savings allowance for basic-rate taxpayers.

This means, assuming the child has no earned income, they can earn up to £17,850 in interest on savings without paying tax on it in the current tax year.

The £100 rule

This may seem like a large allowance available to children, but there is a catch.

If the money you give to a child gains more than £100 in interest in the tax year, all of the interest will be taxed as if it's your personal income.

This only applies to money given by a parent or step-parent, so grandparents, relatives and friends can give as much as they like.

Money in a Junior ISA or Child Trust Fund is also exempt from this rule.

Savings options

If you're deciding how best to save money for a child, you could consider the following options.

Children's savings accounts can be set up on behalf of a child, who can then manage their account from the age of 7.

Some accounts allow instant access to the savings, while others require regular contributions and put a limit on withdrawals.

Junior ISAs, which can be held in cash or stocks and shares, allow you to save up to £4,260 free of tax for a child under 18 in 2018/19.

The child can take control of the account at 16 and withdraw from it at the age of 18.

Bonds can be used for children's savings.

Premium bonds offered by NS&I offer a chance of gaining interest from a monthly draw, while NS&I children's bonds are no longer open for new applicants, but can be renewed if you already have one.

Trusts can be set up for a child under 18 by their parents or grandparents. They are then managed by an appointed trustee or group of trustees.

Children's pensions are a long-term option for saving for children.

You can open a Junior Self-Invested Personal Pension on behalf of your child, which they will only be able to withdraw from after the age of 55.

Talk to us about planning your family's finances.

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