Children aged under 18 and tax – a few key considerations

Children aged under 18 and tax – Income Tax and National Insurance

As with adults, children aged under 18 can earn up to the tax free allowance in each tax year (£12,500 in 2020/2021) and pay no income tax. This is the maximum income that can be earned tax free during each tax year and will include earnings from all sources subject to income tax and National Insurance.

The most common sources of income for children are:

• Earned income from employment
• Earned income from self-employment
• Unearned income from Bank interest and Dividends received – although see comments below.

As an aside, if you are aged 16 or over you may also have to pay National Insurance if your earnings with a single employer exceed £183 per week (2020/2021).

Parents often consider whether it is worthwhile gifting shares in family companies to children who are under 18 and then paying dividends on the gifted shares. The aim is to take advantage of the annual tax-free dividends allowance and the possible lower rates of tax payable by the children.

This strategy is unlikely to work however, as HMRC would seek to treat the dividends as if they had been received by their parent(s).

Once a child reaches the age of 18, the gifting of shares in a family company from parents to the child to divert dividends would be possible. A word of caution, however. This area of taxation is littered with anti-avoidance traps, so before transferring or issuing shares to children, professional advice should always be sought.

Parents also need to be clear that if they employ their children in their business, then they need to pay them a commercial rate for the job that they do for the business. Paying more than market rates of pay to divert income and reduce tax would likely attract the attention of HMRC as would paying a wage to a child who does nothing for the business.

Capital Gains Tax

Children under 18 years of age are entitled to claim the annual Capital Gains Tax exemption (£12,300 for 2020-2021) but obviously only if they can show that they actually owned the assets that they disposed of.

Junior ISAs 

Children under 18 can save tax-free by investing in a Junior ISA. The upper savings limit in these schemes for 2020-2021 is £9,000. Parents can open the Junior ISA account for the child but any money invested in it belongs to the child.

Children can take charge of this ISA investment from age 16 but they cannot withdraw funds from it until they reach 18 years.

THP Chartered Accountants are always happy to advise how to make best use of any tax allowances available to children. Please call us on 020 8989 5147 to arrange a free no- obligation chat with one of our tax experts or complete one of our online enquiry forms by clicking here.