Investing Tax-Efficiently
Important information - Tax rules can change and benefits depend on individual circumstances. Investments go down in value as well as up, so your child could get back less than invested. A Junior SIPP is a type of pension for people happy to make their own investment decisions, and is not accessible until age 55 which is likely to rise by the time your child reaches retirement. The information on this page is not personal advice. If you are unsure if an investment is right for you or your child, please seek advice.
Junior ISAs and child pensions
The main aim of investing for a child is usually to provide a nest egg to help them out financially in later life. However, there are additional benefits that could see the amount of tax needing to be paid both now and in future reduce significantly.
The simplest way to minimise tax is to use a tax-efficient account such as a Junior ISA or child’s pension such as the Junior SIPP. As the investments are held in the name of the child, no tax liability falls on parents either.
As with all things tax, the rules are likely to change over time. The benefits will depend on the individual circumstances of the child and the person paying into the child’s account.
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Child tax rules and gifting
Investments held outside of a Junior ISA or SIPP are liable for tax. One solution is a legal arrangement called a bare trust.
The investments are not held in the name of the child but are normally taxed as if they belong to them. As a child is usually not receiving much income and they have the same tax allowances as an adult, there can often be little tax, if any, to pay.
It is necessary to consider the tax position of the child and also the person who is adding money to the account – known as the settlor. More details about this in the dropdowns below.
You may wish to seek legal or financial advice if you are thinking about setting up a bare trust.
Most children can ‘earn’ up to £18,570 per year without incurring tax (personal allowance of £12,570, starting rate for savings of up to £5,000 and personal savings allowance of £1,000).
The full starting rate for savings will only be available if income other than savings income (e.g. dividend or employment income) is less than £12,570. If this ‘other income’ is above £12,570 then £1 of the starting rate for savings will be lost for every £1 of ‘other income’ above this amount. If the ‘other income’ includes dividends then a tax free dividend allowance of £500 is also available.
They will also have a Capital Gains Tax allowance (£3,000 for the 2025/2026 tax year) as well.
Children can only benefit from income of up to £100 per year on money given to them by each parent. If they receive more, the parents must pay tax on all interest or dividends at their highest rate.
There are no such problems if a grandparent, other relative or family friend has contributed the capital. Only interest or income over the child's personal allowance would be taxed.
When money or assets are paid into an account (including Junior ISAs, Junior SIPPs and Bare Trust Accounts) for someone else's benefit, they are treated as a gift. Some gifts are free or exempt from tax, others may be subject to inheritance tax (IHT).
You can normally give away up to £3,000 per tax year inheritance tax free. This is known as the annual exemption. If you haven't used your annual exemption in the previous tax year you can carry it over into the next tax year, but if you don't use it in that year, the carried-over exemption expires.
For example: if you used £2,000 of your annual exemption allowance in the last tax year you could then gift £3,000 for the current tax year, and £1,000 carried over, a total of £4,000.
On top of the annual exemption is a small gifts exemption. This allows you to give up to £250 each to any number of recipients each tax year, although not to anyone who received a gift from any other exemption.
Please also bear in mind that you can't give more than £250 and claim the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether.
You can also make 'gifts out of income' free from inheritance tax. Regular payments made out of excess income (which don't affect your standard of living) are normally exempt from IHT.
This can be a useful exemption for those wanting to contribute to a child’s investments through regular savings.
If you make gifts over and above exemptions, they may still be free from inheritance tax providing you survive seven years from the date of the gift. These are known as potentially exempt transfers.
Keeping a record of any gifts you make and noting which exemption you've used will make administering your estate easier when you die.
If you make regular gifts out of income as part of your normal expenditure you should keep a record of your after-tax income. These records should be used to demonstrate the gifts you've made are regular and you have enough income to cover them and your usual day-to-day expenditure, without having to draw on your capital.
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