Time is on their side: Tax smart ways to give children a financial head-start

The financial challenges facing many parents will put building a nest egg for future generations far down the list of priorities. But by making smart use of ISAs and pensions before the end of the tax year, you can start building a strong foundation for your children’s future.

Overview:

  • There can be a lot of competing demands on your finances – especially if you have young children and elderly parents to think about.
  • But, with today’s teenagers entering a rapidly evolving work and finances landscape, giving them a head start can make a huge difference throughout their lives.
  • Making the most of tax reliefs and allowances each year can help take the pressure off. The 2021/22 tax year ends on 5th April 2022.

When you’ve got more than your own situation to think about, managing your finances can sometimes feel like spinning plates. You could be trying to balance your own retirement goals, with the care needs of elderly parents and starting your little ones on a savings path.

But, despite having so many competing priorities, the fact remains that if you want to help a young child save for the future, then the earlier these savings are started, the better – and it makes sense to take advantage of the opportunities that are right in front of you.

You may well use some of your tax allowances and reliefs already, but are you getting the full benefits from them? Even the allowances we’re most familiar with, such as the annual ISA allowance, can take some of the strain when you’re trying to keep those spinning plates moving!

Every little bit helps

ISAs can be the foundation here, with Cash ISAs providing rainy-day funds and Stocks & Shares ISAs providing the potential for growth from your investments to help meet your various objectives, from buying a new home to building a retirement fund.

When it comes to putting money aside for younger family members, Junior ISAs (JISAs) are a tax-friendly way of building up a pot of money that children can access when they turn 18. As with other ISAs, everything you put in a ‘JISA’ is free of any further liability to Income Tax and Capital Gains Tax. It must be opened by a parent or legal guardian, but after that, anyone can contribute.

Tony Clark, Senior Propositions Manager at St. James’s Place, commented:

“Today’s teenagers may face working and retirement lives that are very different from those we’re experiencing, so giving them a head-start can really help as they enter the working world.”

As well as gifting money to your children for a future house deposit or university fees, another benefit is removing money from your own estate – which could help reduce the amount of Inheritance Tax (IHT) payable on your estate when you die.

Time is on their side

Pensions are similarly invaluable from a tax perspective, given the difference that pension tax relief in particular can make to your investment growth over time.

This applies to children’s pensions, too – especially as younger investors have time to their advantage. While this may not feel like a priority, the tax benefits on pensions mean that even very modest amounts paid in from a young age can benefit your children later in life. Even if your child’s a non-taxpayer, they will still get basic-rate tax relief on contributions. That means a maximum of £2,880 a year is automatically grossed up to take account of tax at 20%, giving an annual investment of £3,600.

Clark continues:

“Giving them a leg up in their adult life, as well as setting something up for later in their lives, can really open up their choices when they begin to approach retirement.”

Other allowances are sometimes overlooked, but can also make a material difference. The annual Capital Gains Tax (CGT) allowance, for instance, means you can sell a property or investment that has increased in value without paying tax on all the profits you receive.

The allowance is currently £12,300, and there are different levels of CGT, depending on your tax band and the asset you’ve made a gain on. As your assets build up over time, understanding how to get the best from the CGT allowance can become increasingly useful.

Don’t sit on the sidelines

So, to summarise, tax allowances really come into their own in helping you keep your own financial plates spinning, while also getting some moving for your children.

By speaking to an adviser, you can ensure your thinking is in the right place around splitting your money – for instance, how much you should put into a Junior ISA and how much into a children’s pension. Clark concludes:

“An adviser will talk through ways of doing that and make sure you’re not losing sight of your own objectives. They can really help you with the bigger picture.”

It’s also worth remembering that most of the allowances and reliefs (including ISAs and JISAs) you can benefit from work on a ‘use-it-or-lose-it’ basis, so planning ahead is important, and taking advice well before the tax year ends is a way of making sure you don’t miss out.

With the end of the tax year on 5th April 2022, don’t let your tax allowances go to waste. Speak to us today.

It might come down to understanding what will be needed and when, so creating the short, medium and long-term objectives.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

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