Junior ISAs warning – beware using them to save for college funds
The Government has today announced that in November the new junior ISAs are likely to launch, a way to save £3,000 a year tax free for your children… except, erm, well, most children’s savings are tax free anyway.
This new scheme is the replacement for Child Trust Funds (CTFs), see junior ISAs news for the basics.
With CTFs, every UK child born between 1 September 2002 and 31 December 2010 was given between £50 to £500 from the government at birth, plus parents could save a further £1,200 a year mostly tax free on top (free from both income and capital gains tax). The replacement cash Isa has no cash from the Government, but you can save more – a nice sop for wealthier people.
Now, the new junior ISAs aren’t without some merit, but frankly the impact will be limited for most, so let me take you through that before getting onto my college fund worry.
- Most kids don’t pay tax anyway. Everyone aged under 65 is allowed to earn £6,475 a year before paying income tax (£7,475 from next tax year, which starts next Wed, see the income tax calculator). This applies to kids too, though few earn that much so most don’t pay tax.
- Kids savings are ‘mostly’ tax free. As most kids don’t earn over the threshold, their savings aren’t taxed (if they earn over the threshold, they are) and if you fill in an R85 form you get the interest tax-free straight away.
The one exception is money given from parents, (not grandparents, not uncles, etc). If the interest is over £100 per parent it is taxed at the parent’s rate (see top children’s savings). In other words, if you save in the top kids account, each parent can give their child around £3,000 before there’s any problem. The reason for this rule is to stop parents putting all their savings in their kids’ name to avoid tax.
- When your kids are kids the only junior ISA gain is beating this £100 rule. Following on from that the only real gain of the new junior ISAs is if the parents put more than £3,000 into their child’s junior ISA (only possible in year two of junior ISAs) – as then they can save more cash tax free. In fact this would be come a huge gain for the affluent who could afford to give their children £54,000 worth of savings by the time they’re 18. There’s also a capital gains tax benefit but how many kids (other than children of the really rich) make more than £10,100 profit a year anyway?
- There are gains once they’re adults. The one tangible plus of junior ISAs is that they remain tax free even once kids are adults (converting into normal cash ISAs). So once your children are actually paying tax this will shelter the savings made earlier from the taxman – that is, of course, unless the rules are changed in the next 18 years.
The college fund worry
So now onto my main point. The real aim here is to encourage a ‘college fund’ saving mentality in the UK as they have in the US – that certainly helps politically with the whole student loans trebling issue.
Yet, sadly, the Government hasn’t learned from the CTF issue and on a kids’ 18th birthday the money in the cash ISA becomes theirs to do with what they want. So you may’ve put money away for their college fund but they may see it as a Ferrari fund.
Or as one parent once said to me about CTFs, but still applies now: ‘My baby is cute now, but what if they become a drug addict and when they’re 18 want to use the cash to put it up their nose not to pay for university?’ – there’s nothing you could do to stop it.
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