Junior ISAs: Expert busts key myths about how they work as new tax year looms

Up to £9,000 can be put into a Junior Isa in the current tax year, which ends on April 5, so if you haven’t used the annual allowance yet, it’s time to get your skates on. The annual limit for 2024/25 will remain at £9,000.

While many families don’t have anything like the full Isa allowance available to put into an account, they can still build up a sizeable nest egg for their children by putting smaller amounts away often.

According to calculations from investments and retirement savings provider Fidelity, some parents may even be able to build a £18,000 pot by the time their child turns 18 – based on making monthly contributions throughout their life of £55.50. Because of the length of time that the money is invested, savings can grow quite substantially.

Emma-Lou Montgomery, associate director of Fidelity International says: “Many parents and grandparents often aim to kickstart their children’s finances by setting money aside for their future. Our analysis shows that investing £55.50 monthly into a Junior Isa could cultivate a healthy £18,000 pot by the child’s 18th birthday.”

There are some common myths around investing for children, however, that might cause concern or leave families confused. Here, Montgomery delves into them…

Myth one: Children don’t pay tax

“Contrary to popular belief, children are liable for tax, although few are fortunate enough to earn enough on their savings and investments to actually pay any,” says Montgomery. “Just like an adult, they only start to pay tax once they earn above their personal allowance, which is currently £12,750.

“The rules are tougher though if the interest is earned on money from a parent. If your child earns more than £100 in interest in any tax year from money you have given them, then you will find that you are personally liable for tax on the interest earned if it’s above your personal allowance.”

Myth two: Children can’t have a pension

Montgomery says: “You can start saving into a Junior Sipp (self-invested personal pension) as soon as your child or grandchild is born.

“Each child can have a total of £3,600 a year, or £300 a month, saved into a pension. Just as with your pension, the government automatically tops up payments by 20 per cent, so for your child to have the maximum £3,600 a year, total contributions only need to come to £2,880.”

Myth three: Grandparents will pay tax when gifting money

“While parents who save or invest money on their children’s behalf can face a tax bill if their child’s savings or investments earn more than £100 in any tax year, the same does not apply to you when you’re a grandparent,” says Montgomery.

Myth four: Your child can’t get their hands on the money with a Jisa

“With a Jisa, a child gains control of their account when they turn 16, but can’t withdraw the funds until their 18th birthday,” Montgomery explains.

To prepare your child before they take control of their money, she suggests having conversations with them early on, “to instil good financial habits as they witness their wealth grow over the years”.