Gifting grandchildren: Christmas money could trigger a parent tax bill if placed in a child’s savings account
Tax traps around small gifts to grandchildren could be avoided by directing funds into tax-advantaged accounts such as Junior ISAs or by using direct transfers into the child’s own account.
Gifting money to grandchildren at Christmas is a festive tradition for many families. But experts warn that if the gift is funneled into a child’s savings account, it can create a tax bill for the child’s parents. The tax trap hinges on how the interest earned from those gifts is treated for the purposes of the parents’ own personal savings allowance. If the child earns interest on money given by a parent, that interest can count toward the parent’s savings allowance, and the parent may owe tax if the total interest crosses the allowance limit.
Under current rules, a child’s savings interest counts toward the parent’s personal savings allowance if the parent earns more than £100 in interest from money given by a parent, or £200 if the money is given by both parents. The parent’s own allowance depends on their tax band: £1,000 for basic-rate taxpayers, £500 for higher-rate earners, and no allowance at the additional-rate level. Importantly, the tax would be charged at the parent’s marginal rate, not the child’s, meaning basic-rate parents could owe 20% on the portion of interest above their allowance, higher-rate parents 40%, and additional-rate parents 45%.
The practical effect can be acute even for modest gifts. The Coventry Building Society’s Young Saver account, a popular children’s savings option, currently offers around 4.25% interest. At that rate, a balance of roughly £2,350 is needed to generate £100 in interest. The arithmetic matters: if a higher-rate taxpayer with a £500 allowance gifts £3,000 into a child’s savings account, the tax bill on the interest earned could be about £12. This illustrates why some families push money directly into the child’s own account, rather than routing it through the parents, to sidestep the trap.
There is a nuance to the rules: the £100 limit does not apply to money given by grandparents, other relatives, or friends. Still, that doesn’t guarantee a clean outcome, because the tax treatment depends on how the money is held and how the interest is allocated. In all cases, if the parent has exhausted their personal savings allowance—or does not have one—the moment the child earns more than the threshold from money gifted by a parent, even a small gift can trigger a tax bill for the parent. The rate is the parent’s marginal rate, and the scheduled rise in savings interest tax in 2027 would add two percentage points to those rates (22%/42%/47% for basic/higher/additional rate taxpayers).
Given these dynamics, advisers often point to alternatives that avoid the tax trap while still building long-term value for the child. One widely used option is the Junior Isa. All interest, dividends, and investment growth inside a Junior Isa are tax-free, and you can contribute up to £9,000 per tax year. There are both cash and stocks-and-shares Junior Isas, and money inside a Junior Isa cannot be withdrawn until the child turns 18, except in limited circumstances. When the child reaches 18, the Junior Isa is converted to an adult ISA, where the saver can continue to hold the funds or choose to withdraw them to spend on education, driving lessons, or other goals.
Gifting money that is invested inside a Junior Isa can be particularly appealing over cash, as the potential for greater long-term growth can exceed cash deposits. However, the liquidity and spending flexibility differ, since access is restricted until the child reaches 18. For families seeking a more flexible, cash-based approach, premiums bonds provide another option. Premium Bonds do not pay interest, but each £1 saved enters a monthly prize draw with tax-free prizes ranging from £25 to £1 million. The minimum investment is £25. If the gift is made for someone else’s child, the parent or guardian must be willing to supervise the account until the child turns 16 and must consent to share their details with NS&I.
For families weighing these choices, the key takeaway is to plan how the money will be held and how its earnings will be taxed. Transferring funds directly into the child’s own account, when appropriate, can avoid the parent’s personal savings allowance entirely. Where the goal is long-term growth with tax efficiency, Junior Isas offer a compelling, tax-free path, albeit with restricted early access. Premium Bonds offer liquidity in a different form—potential prizes rather than guaranteed interest—and require parental oversight when gifts are made for someone else’s child.
The broader context for 2025 into 2027 is a shifting tax landscape for savings and investments. As the government adjusts savings rates, families are urged to review how gifts to children are structured to minimize unnecessary tax exposure. Financial advisers caution that a thoughtful, documented plan—whether direct transfers, a Junior ISA contribution, or a combination—can preserve more of the gift’s value for the child.
As Christmas approaches, families should consider talking with a tax adviser or financial planner to tailor a strategy that aligns with the child’s future goals and the parents’ tax position, ensuring that a generous gift fulfills its intended purpose without triggering an unwelcome tax bill.