All parents with children have been issued a warning from financial guru Martin Lewis. During the latest episode of his ITV programme, The Martin Lewis Money Show, he left many watching from home and in the studio audience in shock as he gave a word of warning regarding child saving accounts.
The Money Saving Expert founder told viewers that there is a maximum amount you can give your kids before you start running into trouble. The revelation came as a suprise for many as prior to explaining his warning, he asked people in the audience whether they thought that kids have to pay tax.
The vast majority said they don't think children have to pay tax. However, they were quickly proven wrong as Martin revealed that in fact, they do - and there could be legal trouble if you hand them too much money, as reported by Yorkshire Live.
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Martin explained that children do actually pay tax and that they are legally considered 'taxable entities' by the government. He said this then means any money children earn can be taxed mostly just like an adult's earnings would be.
According to current UK law, children can legally work from age 13. Though, the hours and days a child can work is limited until they reach 16. But at any age, a child's earnings are subject to tax, and as such, any gifts of money you give them are as well.
"This is important to understand. If the money you give them earns over £100 interest per year, and that's per parent, then it would be taxed at the parent's rate, not at the child's rate." Martin said.
"Now on current top easy access that's about £2,500. If you give them over £2,500... then you're going to be over £100 of interest generated. Now why is this done? Well it's easy, it's so you don't stash all your money in your kid's name and use their tax-free allowance as an easy tax loophole."
He continued: "But, what do you do about it? Well, if they're gonna earn more than £100 and you pay tax on savings then that's where a Junior ISA comes into its own."
Martin suggested that a Junior ISA is useful because it gives you tax-free savings for your kids for up to £9,000 per year. He urged viewers that have one to 'check the rate' because if it's lower than other providers, you can transfer it to a better option without losing tax-free status, and many are probably missing out on interest by leaving it with a poor rate.
But Martin did add that the downside of a Junior ISA is that the money is locked away until the child is 18. Martin continued: "The curse of Junior ISAs is the money is locked away and cannot be taken out until they are 18.
"And on their 18th birthday, the money is theirs. It is not the parents', it is not the grandparents', so let me be plain about this. When your child is 18 and you've been saving for its university income and it decides it wants to go on a smoking weekend in Amsterdam, it is their choice, not your choice. So be aware that is the rule."
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