How to maximise returns on children’s savings accounts

The big banks are paying as little as 0.25% on children’s savings. We show you how to maximise interest payments, and which accounts to ignore

First the bad news. Children’s savings accounts are, on the whole, dreadful. The big banks pay as little as 0.25% interest a year, hardly an incentive for children to learn the savings habit. But now for the good news. With a little bit of searching around you can find children’s accounts paying 3% interest, and Junior Isas as much as 6%.

The paltry rates paid to young savers by some institutions are quite shocking. HSBC, for example, calls its offering the “High Interest Savings Account for Children”. The high interest? A miserable 0.5%.

We looked at the interest paid on balances of £500 or more. NatWest’s Young Saver pays a gross 0.8% and Nationwide’s Smart account just 0.75%. But the award for meanest big bank goes to Barclays. Its Children’s Saver pays a measly 0.25%.

So if you’re a parent, grandparent or guardian, and want to open an account for a child, what should you do?

It’s as easy as 1-2-3:

1. Decide which type is the most suitable

There are a wide variety of account types, from instant access to regular saver accounts and fixed rate bonds, where early access to the money may be restricted.

Your choice will depend largely on whether you want the child to be able to use it (with your help) to deposit irregular and small amounts. If so, it is preferable to choose an account at a branch near home, with a passbook, so they can see their savings grow. Or one which you, and maybe other relatives, want to use to save on the child’s behalf in order to build them a nest egg.

2. Avoid tax on your child’s savings

A child is likely to be a non-taxpayer and therefore can earn gross interest on their account, without the automatic deduction of 20% tax. Children, like adults, have a personal allowance (£8,105 for the tax year 2012-13) which is money they can receive tax-free.

So as long as their annual income, including interest from savings, is below this amount, they can receive interest on savings without having tax deducted. To make sure savings interest is paid gross, parents or guardians need to fill in an R85 form, available from all banks and building societies or downloadable from

But the tax authorities are worried that it would be too easy and tempting for adults to put all their savings in their children’s accounts to avoid tax. So while you can invest as much as you like in an account on a child’s behalf, if the money you give your child earns more than £100 a year, the whole lot will be taxed as if it were your own, and no interest will be paid gross. The £100 rule applies to young people until they reach 18 or marry, whichever comes first.

The rule applies separately to each parent (or civil partner), so if both parents contribute equally the child can earn interest of up to £200 a year without tax. But the rule doesn’t apply to grandparents, who are free to deposit as much as they like into a children’s account.

3. Seek out the best-paying accounts

Best for instant access

• The Little Rock instant access account from Virgin Money, pays 3%. It is a passbook account aimed at the under-16s, and can be opened with £1.

As the name suggests, you get instant access, with no limit on the number of withdrawals. The account can be operated at a branch, by post or by phone. An adult must be named on the account alongside the named child as a trustee.

• The Young Savers branch-based instant access account from Lloyds TSB, also pays 3% on £1-£20,000 (0.5% on £20,000+) but can only be opened by a child under 16 with a parent or guardian who already has a Lloyds TSB current account. It comes with a gift of a Stanley (the dog) money box and the controlling adult can boost the child’s savings by registering for the bank’s “save the change” incentive, so that every time they use their Lloyds TSB Visa debit card, the bank rounds up the amount spent to the nearest pound, and transfers the difference from their current account into the child’s account.

Skipton building society’s instant access Leap Issue 2 account, open to children up to 18, pays 2.75% on £1 – £50,000, but this variable rate includes an introductory bonus and drops by 0.50% after the first 12 months.

If the child is under eight, an adult will need to open the passbook-based account and sign withdrawal slips. Children get stickers to collect, and cash in for children’s books each time they save £20 in their account.

• The Halifax Young Saver instant access account for children aged 0-15 pays 2% on a minimum £1 with no limit to the amount that can be saved or withdrawn. A cash card can be issued if the child is seven or older. The person opening the account must be over 18.

Best for regular saving

If you want to stash regular cash away on behalf of a child aged under 16, Halifax’s one-year Kids Regular Saver pays a fixed rate of 6% on regular monthly savings of between £10 and £100 a month by standing order only, with no withdrawals during the 12 months. You don’t have to save the same amount each month. Interest is paid on maturity after 12 months on a maximum of £1,200.

Best for locking the money away

If you are happy to do so for longer periods, look at Leeds building society’s Young Investor 5-Year Fixed-Rate Bond (issue 5) paying 3.25% on £100 plus for 0-17-year-olds, maturing on 31 July 2017, which allows limited withdrawals and five-year bonds, all paying 3.20% from Clydesdale Bank (min. £50), Yorkshire Bank (£50) and Halifax (min. £500).

Best for going local

Higher-paying instant access accounts offered by smaller savings providers include Mansfield building society’s Young Saver paying 2.5% on £1-£25,000, Stafford Railway building society’s First Track paying 2.25% on £1-£25,000 and Earl Shilton building society’s Foundation paying 2.25% on £250-£10,000. Bath building society’s Futurebuilder pays an impressive 5% gross on the first £500, above which the rate falls to 1.10%. But the account is only open to applicants living in Wiltshire, Somerset, Gloucestershire and Dorset.

Best ‘first bank account’

Not strictly a savings account but, for older children who are ready for a current account that also earns them a competitive rate when in credit, consider Santander’s 11-15 Current Account which pays 3% on balances up to £500, as long as they pay in some money in each month.

The account comes with a debit card or cash card if preferred to access their money plus online and mobile banking facilities. There is no overdraft, so a child can’t spend money they don’t have.

Jill Papworth © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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