In the episode, Martin Lewis offers a “complete guide” to saving and investing for children
Martin Lewis has issued a “warning for parents”(Image: ITV)
Martin Lewis has issued a warning to people with kids as he raises the alarm about a “hidden tax trap”. The MoneySavingExpert founder explained all in a new episode of his BBC Sounds show, The Martin Lewis Podcast.
He says parents who invest or save for their children “need to know how it works” as it’s there to stop you “stuffing all your money in your kid’s name”. Martin Lewis said: “Parents, I’ve got a warning for you. There’s a hidden tax trap if you’re investing or saving for your children.”
He says if a child earns over £100 a year in interest or dividends from money specifically given to them by their parents or step-parents, that income is taxed at the parent’s marginal tax rate. If the parent is paying tax on their own savings or investment dividends, the child will also be taxed on that money.
He told listeners: “Now, most under-18s don’t usually pay tax, not because there are special rules for them, but because, like adults, they can earn £12,570 per tax year, usually, without paying any income tax on it. And most kids don’t do that. It would be a hell of a paper round.
“But on money specifically given by parents or step-parents, not grandparents, aunties, uncles or others, if your child earns over a hundred pounds a year of interest or dividends from it, then that is taxed at the parents’ marginal tax rate. So, if the parents are paying tax on their savings or investment dividends, then the child will too.”
Martin Lewis suggests using a Junior ISA, as money held within one is tax-free, even if it was originally provided by the parents. He says this also helps protect the child from capital gains tax.
“Now most parents don’t pay tax on savings,” he said. “Either because you’ll know you have the personal savings allowance, which for a basic rate taxpayer means you can earn £1,000 a year of interest without paying tax on it.
“But in the event that you do pay tax, they will pay tax. And this is one of the reasons a junior ISA would come into its own, because money inside a junior ISA is always tax free, even if the parents have given the money. It’s locked away till they’re 18.”
Most parents do not pay tax on savings due to the personal savings allowance, so this “trap” only becomes an issue if they are already paying tax on their own savings or investment dividends. This specific tax rule only applies to money given by parents or step-parents, not by grandparents, aunts, uncles, or others.
Martin Lewis said: “If you’re saving and investing and you may pay tax, take a look at a junior ISA. It will also help protect your children from capital gains tax if their investment returns do well. And for much more info on investing and saving for your children, the best ways to do it, the best buys and best funds, have a listen to this week’s podcast.”
