The Top Tax Shelter For Under-18s

Published in Investing on 27 March 2012

When saving or investing for youngsters and teens, this is the UK's best tax haven!

As the parents of two children at primary school, my wife and I are doing what we can to help them financially as they head for adulthood.

My daughter was born in 2003, so she was the right age to qualify for a Child Trust Fund (CTF). However, my son was born in 2001, so he's too old for a CTF. Instead, he has a portfolio of shares sheltered safely inside a bare trust.

As well as these share-based investments, my children also have cash savings accounts, into which go money from family and friends. Also, they both have pensions, which they cannot touch until they are 55 or over.

Juicy Junior ISAs

Alas, because my daughter has a CTF, she is the wrong age to have the latest tax haven for kids, known as a Junior ISA (Junior Individual Savings Account, or JISA).

On 1 November 2011, JISAs replaced CTFs as the tax haven of choice for parents, grandparents, other relatives and friends, to save and invest for babies and toddlers. These folk -- and the children themselves -- can put up to £3,600 a year into a JISA, which works out at a round £300 a month.

However, any child with an existing CTF (who was born between 1 September 2002 and 2 January 2011) cannot also have a JISA. Then again, all children born on or after 3 January 2011 can open a JISA, as can children born before 1 September 2002. My son falls into this second category, so he is excited that -- at long last -- he too can have his own personal tax shelter!

Despite these age restrictions, roughly six million children are eligible to open a JISA, with 800,000 newborns added to this group of potential savers and investors each year.

Two types of tax haven

Just as adults can choose between cash ISAs and stocks and shares ISAs, children can shelter cash savings in a cash JISA, and keep shares, funds and other investments inside a stock and shares JISA. (For your full guide to ISAs, please download your free copy of our ISA Guide 2012 today.)

With a Junior ISA, there is no tax to pay on cash interest (even in stocks and shares JISAs), no tax on share dividends (the regular cash payouts to shareholders) and no tax on capital gains (the profits made from selling shares and other assets). Thus, JISAs are set to become the number-one tax haven for young savers and investors.

As a bonus, the JISA allowance will rise in line with the Consumer Prices Index (CPI) measure of inflation from the 2013/14 tax year onwards. This means that as the cost of living rises, so too can contributions.

Transfers between JISAs

Adults can open new cash or stocks and shares ISA each tax year with different providers. Sadly, children can have only one cash JISA and one stocks and shares JISA. Thus, it pays to choose JISA providers wisely.

However, as with ISAs, transfers between JISA providers are allowed, so you can switch to better-value JISA accounts at will. In addition, transfers from stocks and shares JISAs to cash JISAs are allowed, but this transfer is still banned between adult ISAs.

Sweet 16 and 17

I can reveal one sneaky loophole for teens aged 16 and 17. Uniquely, children of this age can have both Junior ISAs and cash ISAs, because adult cash ISAs are open to savers aged 16 and over. Hence, teens of rich families could pump £3,600 plus £5,340 into these two tax shelters, a combined total of £8,940 this tax year and £9,240 in 2012/13.

Finally, at 16, teens can take over the management of their Junior ISAs. At 18, these convert into full-blown adult ISAs -- and these brand-new adults have complete control of their pots. Let's hope they spend and invest their money wisely... and not on fast living!

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m00rfield 27 Mar 2012 , 10:54am

"At 18, these convert into full-blown adult ISAs -- and these brand-new adults have complete control of their pots."

And therein lies the problem.

Not that I don't trust my offspring but I am not willing to take the risk off saving my hard earned for years only to watch it disappear on beer and Ibiza in short order.

(Ask yourself this question: What would you have done if you had been given a large lump sum of cash in the summer after finishing your A levels?)

Would rather save up in a pot in my control which can then be passed on when it is really needed and appreciated - the early 20s post university years.

Tarkers 27 Mar 2012 , 12:59pm

My son is the same age as your daughter(a 2003 child) but I hadn't thought of setting up a pension for him yet !! Is there any tax relief for me on contributing to a pension for him ?

winch2 27 Mar 2012 , 1:35pm

Pensions don't give you any tax relief, but the child gets 20% extra. We pay £50 a month into each child's account, they receive £60 after tax.
It's well worth doing. The pot for our older child was projected to be £900k. For the younger one (by 2 years), he'd get £1m on the same projection. Not a bad return for £1200 investment: the joys of compound interest!

Tarkers 27 Mar 2012 , 2:43pm

I presume that by '£1200 investment' you mean £600 per year per child for 16 years then stop paying in.

This would equate to paying in £9600 per child over 16 years. The tax benefit increases that to £11,520 which still looks cheap if the projection is accurate !!

The projections I've seen assume 7% annual growth and require £300 per month for 16 years to receive a projected pot of £1.2m. If we divide this by 6 to match your £50 contribution then a reasonable projection might be £200k.

CunningCliff 27 Mar 2012 , 6:45pm

Hi Tarkers,

Yes, your children can claim 20% tax relief on pensions contributions of up to £3,600 per tax year, even if they've never paid a penny in tax.

For example, a yearly contribution of £2,880 would attract tax relief of £720 paid directly into the fund by the taxman, making a total of £3,600.

What's more, they can't touch this money until age 55, which allows for a lifetime of growth!

All the best,


Thangbrand 27 Mar 2012 , 10:15pm

Betcha it won't be age 55 by the time they get there! 70, more like, with people living to 130.

Still the money is safe in its tax haven - after all, you know that you can trust the government over the next 50 years.

Thangbrand 27 Mar 2012 , 10:22pm

"(Ask yourself this question: What would you have done if you had been given a large lump sum of cash in the summer after finishing your A levels?)"

Well, now, I expect I would have given some to my mother, since she was quite hard up. I would have given 10% to my church, since I was a Christian in those days. I would have bought a new bicycle, since the old one that I was using to get to my temporary job was breaking up. And I expect I would have put the rest into a Post Office Investment Account.

Married a wife with much the same background. Brought children up with much the same attitude. But no large sums of money to give them!

hbslc 28 Mar 2012 , 2:32pm

How does a child claim their tax-relief on your contributions to their pension?

CunningCliff 28 Mar 2012 , 4:56pm

hbslc, this tax relief (at 20%) is added automatically at source. You pay in your contribution and the tax relief eventually follows. On occasion, this delay can be several months, but can be just weeks.


CunningCliff 29 Mar 2012 , 3:17pm

PS: With any luck, the thousands of pounds I've invested for my son will be enough to buy one tank of petrol, a Cornish pasty or a first-class stamp when he turns 18 in eight years! ;0)


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