HMRC (aka The Gruffalo)
I am not kidding – children do pay tax but they also have their own personal allowance and can make use of the Starting rate for savings and their own Personal Savings Allowance. If all of their income comes from interest (rather than dividends or wages) this means that a child could have £18,570 of interest income without paying tax (2023-24 rules). Children are also entitled to the £6,000 annual exemption from capital gains tax due when certain assets are sold. There are tax-efficient savings accounts like the Junior ISA. A financial adviser can also help you set up a Junior SIPP for pension contributions if you are looking for other ways to be tax-efficient.
But before you open a bank account in your child’s name and give them some money, bear in mind that if the interest goes over £100, ALL of that interest will be taxable on you. This is not the case if the capital is given to the child by a grandparent, other relative or friend.
Inheritance Tax rules will come into play when gifts are made. There are annual limits and gift allowances but you should talk this through with a tax accountant before you decide how much money to give. There is also a concept called “gifts out of income” which covers regular payments that don’t affect your standard of living. For any gift, but especially those out of income, you MUST keep detailed records for HMRC.
Keeping it in the family
We work with a lot of family businesses. We are frequently asked about the rules for employing and paying a young person.
Here’s my top 7 take-aways:
- Children under the age of 13 are not permitted to work other than in TV, theatre and modelling
- There are rules about how many hours a child can work based on their age and depending on where you live in the UK
- Minimum rates of pay may apply and will depend on their age
- You’ll have to register as an employer and include them in a payroll once they earn more than £123 a week
- You can only pay them the going rate for the work they do – if you pay them more than you’d pay a 3rd party, your business may not get tax relief and the income might be taxable on you
- An employment permit from the education department of your local council may be required – if you live in West Sussex (which is where Composure is based) here is the WSCC information on applying for a Child Work Permit
- There are lots of rules about their working conditions and these may differ between term times and the school holidays – here’s good place to find out more: https://www.gov.uk/child-employment/restrictions-on-child-employment
Full transparency – Burchell child #3 will be working for Composure this summer helping us digitise our historical records – he’s thrilled as you can imagine.
Can we help you with questions about your tax? Would you like to know more about your family’s financial position? We work holistically with our clients meaning that the same team will look after you, your family and your business. In our experience this brings huge benefits and is a more rewarding way to work together. Book a call in with one of the team to see how we can help you.