Junior ISAs: Children ISA Explained

Dave Beard

Written by Dave Beard on March 20, 2019

Updated May 20, 2019

Child learning to save up

Many parents and other relatives want to start saving early in order to put their children on the path to a stable financial future. Whether you plan on saving so they can purchase their first home, go to university or just have some money to fall back on should they need it, saving for your child’s future is always a worthwhile investment.

Years ago, saving for your children would mean a piggy bank for their pocket money, but these days there are far more sophisticated and beneficial ways to put money aside for their future. Children’s ISAs are one of the most popular ways for parents and relatives to save for a child’s future, and they have a range of benefits for both you and your little ones. This guide covers what a children’s ISA is, how it works and the types of ISAs available.

What is a Children’s ISA?

Children’s ISAs, or Junior ISAs as they are often known, are a tax-free savings account for anyone under the age of 18. They were launched at the end of 2011 as a method of tax-free saving and investing for children.

At the time, they replaced the Child Trust Fund (CTF) scheme and differed as they offered a way for older children to save tax-free. Child Trust Funds can be transferred into a Junior ISA, but you will not be able to open an ISA for your child if they already have a CTF.

Anyone can pay money into a Children’s ISA, and a parent or guardian can open them on behalf of a child. Up to £4,260 can be paid into a Junior ISA in one tax year, and the money invested is not subject to any personal income or capital gains tax.

They operate similarly to a normal ISA. However, they have some key differences, such as they can only be opened for children under the age of 18 and the child will not be able to access the funds in the ISA until they reach the age of 18.

Children’s ISAs or Junior ISAs can only be opened for children that live within the UK, are under the age of 18, and do not currently have a Child Trust Fund.

How does a Children’s ISA work?

A children’s ISA must be first set up by a parent or guardian of the child, and once they are set up anyone can make a payment into the account, not just the parents. This means that other family members and friends can pay money into the child’s savings account should they want to.

The amount that can be saved each tax year is currently capped at £4,260, and all cash and investments that are saved in a Junior ISA are protected by a tax-free wrapper, in the same way as an adult ISA. This means that for as long as the money is kept in the ISA account, there are no taxes to pay on it.

All of the money within a Children’s ISA will legally belong to the child, although they will not be allowed to access it until they are 18 years old. As soon as the child reaches 18, the Junior ISA will be automatically transferred to a normal adult ISA, which means they can continue to save in the account if they want to.

As with an adults ISA, Junior ISAs are not limited to just saving cash, but you can also save in stocks and shares, or a combination of both.

If you want to save using a combination of both cash and stocks and shares, the same cap of £4,260 still applies for each tax year.

What are the types of Children’s ISA?

When you open a Junior ISA for your child, you can choose to open them a cash ISA or a stocks and shares ISA:

  • Junior cash ISA: A junior cash ISA works in the same way as a bank or building society account for savings. The main difference being that no tax needs to be paid on the interest earnt within the account.
  • Junior stocks and shares ISA: Just like with an adult ISA, you can put your child’s savings into various investments as shares and bonds. If you make profits on these investments, then they will be completely free from tax.

Choosing to invest your child’s savings with a stocks and shares ISA is always going to be riskier that with a cash ISA, but they could receive a much larger profit. Just bear in mind that the value of a stocks and shares ISA can go up as well as down.

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