Children’s accounts, excluding Junior ISAs, are not tax free. It’s a common misconception that children don’t need to pay tax on their savings, but they do – just like adults.
Children may have a Personal Savings Allowance. The first £1,000 of overall savings income earned by basic rate taxpayers will be free from income tax, the first £500 for higher rate taxpayers, and there is no allowance for additional rate tax payers. Depending on personal circumstances, you may need to pay tax on the interest earned and it will be your responsibility to pay any tax owed to HM Revenue and Customs (HMRC).
If a parent (including civil partner and step parent) gifts money to their child and the interest from it is more than £100 a year, then that interest counts towards the parent’s personal savings allowance, and may be taxable depending on the parent’s personal circumstances.
This also applies if the interest on the gift, added to any interest we’ve already paid, makes a gross interest payment of over £100. This £100 threshold applies to each parent individually. All accounts a parent holds for the child (whether or not they are held with the same bank or building society) are taken into account. The £100 rule does not apply to parental contributions to a Junior ISA.