Money expert Martin Lewis has issued a warning to parents giving money to their kids this Christmas because you could end up being stung with an unexpected tax bill.
Few people realise that children actually pay tax, or at least are just as liable to pay tax as adults are, except they rarely earn enough income to do so.
But there is a little-known tax trap involving giving money to your kids which could land you with a most unwelcome letter from HMRC after Christmas.
The rule appears to be designed to stop parents hiding money from the taxman in their children’s accounts, and effectively taxes parents at their normal Income Tax bracket for interest their child earns on money they gave them.
Although most children will be opting for toys and gadgets this Christmas, many older children especially may opt for cash to spend instead, and it’s here where parents can get into tax trouble.
Speaking on the latest episode of The Martin Lewis Money Show Live on ITV1 and catch-up service ITVX, Martin said: “Most children if they don’t have any earnt income can earn £18,570 a year from savings interest tax-free.
“So you’d need about £400,000 before they’d start being taxed on it so the tax isn’t that big a deal for most children.
“Though – if it is a gift from a parent or step-parent specifically, and it generates interest of over £100, so not a grandparent, then yes, if it’s money from a parent then it is taxed at the parent’s rate. So if the parent is paying tax on savings, the children’s interest above £100 will be taxed if the money is from a parent.
“And that’s when a Junior ISA really comes into its own because then you can protect from that tax.”
The tax rule doesn’t apply to money from grandparents, only from parents, and you can shield from the charge by using a Junior ISA instead of a savings account for your child.
The catch is that the money is fully theirs, not yours, and your son or daughter will be free to withdraw the lot and spend it on whatever they want the moment they turn 18.
