Children and tax: What you need to know
Children are treated independently for tax purposes. If they earn sufficient income, they are taxed like adults, with their own:
- Personal Allowance
- Basic rate tax band
- Savings allowance
- Capital Gains Tax (CGT) annual exemption
This independence creates opportunities for families to manage income and assets efficiently.
Working in the family business
One legitimate way to utilise a child’s Personal Allowance is to employ them in the family business:
- The work must be genuine, with payment only for actual work done.
- Salaries must be commercially justifiable.
- Minimum wage rules must be followed.
This can reduce the family’s overall tax liability while giving children real work experience.
Transferring income-producing assets
If a child’s income is low, transferring income-generating assets to them can allow full use of their Personal Allowance.
- Transfers from parents: If income exceeds £100 per year, it is taxed back on the parent.
- Transfers from grandparents or other relatives: These can provide greater tax efficiency.
When planning such transfers, consider the potential Inheritance Tax (IHT) implications.
Top tax tips for grandparents
1. Lifetime Gifts and inheritance tax exemptions
Despite concerns over recent budgets, inheritance tax exemptions remain available to help grandparents support grandchildren:
- Annual exemption: £3,000 per year
- Small gifts exemption: Up to £250 per recipient
- Wedding gifts: Up to £2,500 per grandchild or great-grandchild
- Gifts out of normal income: Exempt from IHT provided they come from surplus income and don’t reduce your standard of living
- Gifts made more than seven years before death: Also exempt and taper relief may apply between years 3 – 7.
These can reduce the value of your estate above the £325,000 nil-rate band, minimising inheritance tax.
Many estates can benefit from the extra Residence Nil Rate Band (up to £175,000) when passing a home to direct descendants.
2. Pension Contributions
Grandparents can contribute to a grandchild’s pension, providing long-term financial security:
- Pensions can be set up from birth by a parent or guardian.
- Contributions of up to £2,880 per year receive 20% tax relief, increasing the total to £3,600.
- If invested from birth until age 18 and left to grow, these contributions can become a substantial retirement fund.
Tip: Contributions to an adult child’s pension also count as if the child made them, which can affect eligibility for benefits like the High Income Child Benefit Charge or Tax-Free Childcare.
3. Junior ISAs
Grandparents can pay into a Junior ISA (JISA) for their grandchild, provided the account has already been opened by the parent or legal guardian. Junior ISAs allow children under 18 to build tax-efficient savings:
- Investment limit: £9,000 per year
- Management: By parent or guardian until age 16 (child gains control at 16; withdrawals at 18)
- Junior ISAs convert automatically into adult ISAs at 18.
Tip: Make sure contributions are made before 6 April each year, as ISA allowances do not carry over.
4. Child Trust Funds (CTFs)
Children born between 1 September 2002 and 2 January 2011 may have a CTF:
- Government initially deposited at least £250
- Average matured CTF value: £2,240
- Owners can withdraw or reinvest at age 18
Grandparents can initiate the search process if they have the necessary details, although the search is designed for parents or the account holder (if 16+).
Check for “forgotten” CTFs on gov.uk, as hundreds of thousands remain unclaimed. The government estimates that 758,000 matured CTFs have not been claimed by their owners. Many have simply forgotten that a CTF was opened for them.
Tip: Searching ‘find my Child Trust Fund’ on gov.uk will start the process of tracking down any lost account.
5. Lifetime ISAs (LISAs)
Parents or grandparents may want to consider gifting funds to adult children to invest in a Lifetime ISA (LISA). LISAs can currently be used to buy a first home, or save for later life:
- Adult children (18–40) can benefit from contributions to a LISA
- Maximum contribution: £4,000 per year/li>
- Government adds a 25% bonus, up to £1,000/li>
- Can be used to buy a first home or save for retirement
A new first-time buyer product may replace or supplement LISAs, but current rules allow ongoing contributions.
We can help
Passing wealth to grandchildren can be highly tax-efficient with careful planning, but the rules are complex and can change over time. Our team of experienced tax advisors can guide you through your options and help you choose the most effective options for your family. Contact us today to discuss how we can help.
Discover more tax planning ideas
Download our full Year End Tax Planning Guide to explore these options and other tax planning opportunities you could take advantage of before 5 April.
Ammad provides personal taxation planning, advisory and compliance services.
