2 easily believed myths about investing on behalf of a child, busted

Have you ever heard the story of David Brailsford, the Olympic cycling coach who transformed Team GB from lacklustre competitors to worldwide champions?

After 100 years of mediocre results for GB cycling, Brailsford stepped in and changed everything in 2003. He led the team to win at the Tour de France, Beijing Olympic Games, and London Olympic Games.

He achieved this through one powerful method: capitalising on marginal gains.

By improving the aerodynamics of the bikes, the cyclists’ sleeping conditions, and dozens of other factors by just a few percentage points, Brailsford eventually led Team GB out of their slump.

This is a powerful story about the effectiveness of marginal gains. Apply it to your money, and you may realise that small savings and investments made over the long term could have a huge impact on your and your family’s lives.

One way to harness the power of marginal gains is to invest money on behalf of your children. You could do this by:

• Opening a Junior ISA (JISA), which works like a Stocks and Shares ISA with a £9,000 a year subscription limit, as of the 2024/25 tax year
• Starting a pension for your child, into which you can contribute a limited amount tax-efficiently (more on this later)
• Placing shares in trust for your child to benefit from later in life.

Unfortunately, there are prevalent myths about investing on behalf of a child that may prevent you from doing so tax-efficiently (or stop you from taking this step at all). Keep reading to learn two of these myths, and the truth behind them.

1. “Investing on behalf of a child is totally tax-free”

Investing on behalf of your child could set them up with a pot of wealth to use later in life. And, using David Brailsford’s example of how marginal gains can make a huge difference over time, you don’t have to invest a huge amount to build up this pot.

As you read above, you could put these invested funds into a pension or JISA, depending on when you’d like your child to be able to access their money.

Using a pension as an example, Investors’ Chronicle found that “£300 a month invested between a child’s birth and age 18, assuming 20% basic-rate tax relief on contributions, investment growth of 5%, and charges of 1%, would grow to £581,240 by the time they reach 65”.

However, one common myth surrounding investing on behalf of a child is that parents can do this tax-free.

Actually, as of the 2024/25 tax year:

• Parents can invest up to £2,880 (£3,600 gross) into a child’s pension pot every year while receiving tax relief. If your child has earnings, you can usually contribute the lower of £60,000 or 100% of their income while receiving tax relief.
• Shares and other assets placed in trust may still be subject to CGT when your child receives the funds later in life.
• Tax-efficient JISA investments are limited to £9,000 a year, separate to the adult ISA limit, and anything above this could be subject to a tax charge.

The good news is that you can still invest plenty on behalf of your child tax-efficiently.

However, the myth that investing for a child is totally “tax-free” could mean you and your children have unrealistic expectations of your tax burden, leading to stress and confusion down the line.

2. “Saving in cash is better than investing on behalf of my kids”

While cash is often considered the “safer” option for building wealth, long-term investing could provide your child with more competitive gains.

At the time of writing, cash accounts are offering attractive interest rates of between 4% and 5% in many cases. But long term, the real-terms spending power of your cash savings is likely to be eroded by inflation, whereas Schroders research shows that a diversified investment portfolio is likely to offer more reliable returns.

Importantly, there is also a £100 limit on how much interest your child’s cash savings can earn before the amount is added to their parent’s Income Tax bill. If the savings you make on behalf of your child surpass £100 in interest payments, the entire amount – including the initial £100 – normally counts as income for tax purposes.

This rule, combined with the effect of inflation, could mean that cash is not always “the best” way to save for your child’s future.

Get in touch

Your circumstances are unique, and the rules around saving and investing on behalf of someone else are complex. If you wish to avoid misinformation and create a bespoke plan, consider working with a financial planner.

Email enquiries@prosserknowles.co.uk or request a callback from one of our advisers.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.