Tax trap for Christmas gifts to grandchildren could hit parents with hefty bills
Experts warn that gifting money to a grandchild and putting it into a child's savings account can trigger income tax on the interest for the parents unless the money is placed in tax-free wrappers such as a Junior ISA.
Gifting money to grandchildren at Christmas can be a meaningful way to help their future finances, but experts warn that the way the gift is handled can trigger a sizeable tax bill for the parents. If the money is placed into a child’s savings account, the interest earned is treated as the parents’ savings income for tax purposes, effectively turning a grandchild’s gift into a potential tax liability for the parents. The parent will owe tax on all the interest if it exceeds their own personal savings allowance, which is £1,000 for basic-rate taxpayers and £500 for higher-rate earners. Additional-rate taxpayers have no personal savings allowance and pay tax on all savings interest.
The rate available on some children’s savings accounts underscores the potential impact. Coventry Building Society’s Young Saver account, for example, offers an interest rate of 4.25%, so you would need about £2,350 in the account to earn £100 in interest. To illustrate the risk, a higher-rate taxpayer with a £500 allowance who gifts a one-off lump sum of £3,000 into a child’s savings account could end up paying about £12 in tax on the interest alone.
A straightforward workaround is to avoid placing the money in a standard savings account for the child and instead contribute to a Junior ISA. All interest, dividends, and investment returns earned inside a Junior ISA are tax-free, and you can contribute up to £9,000 into these accounts each tax year. The £100 limit on the parent’s savings allowance does not apply to money given by grandparents, relatives, or friends, but that does not mean the arrangement is without potential pitfalls. If the parent has exceeded their personal savings allowance or does not have one, and the child has already earned more than £100 in interest from money given by a parent, even a small gift could generate a tax bill for the parent. The tax will be payable at the parent’s marginal rate—20% for basic rate, 40% for higher rate, and 45% for additional rate taxpayers. From April 2027, the tax rate on savings interest will rise by two percentage points, to 22%/42%/47% for basic, higher, and additional-rate taxpayers, respectively.
Junior ISAs come in both cash and stocks-and-shares variants. Cash Junior ISAs offer simplicity and tax-free growth, while a stocks-and-shares Junior ISA can potentially deliver higher long-term returns, especially for younger children who have years to ride out market fluctuations. However, money in a Junior ISA cannot be accessed until the child turns 18, except in exceptional circumstances. At age 18, the account rolls into an adult ISA, where the funds can remain sheltered or be withdrawn to fund education, a car, or other expenses at the saver’s discretion.
For those seeking alternatives to traditional savings, Premium Bonds are another option. The government’s NS&I Premium Bonds do not pay regular interest. Instead, each £1 saved earns an entry into a monthly prize draw with tax-free prizes ranging from £25 to £1 million. The minimum investment is £25. If you’re buying Premium Bonds for someone else’s child, the parent or guardian must be willing to look after them until the child turns 16 and give you permission to share their details with NS&I.
Practically, the most reliable way to minimize the risk of a tax bill is to direct the money straight into the child’s own bank account, rather than giving it to the parents to deposit on the child’s behalf. Otherwise, the gift could inadvertently trigger a tax bill for the parents on the interest. While gifts from grandparents, relatives, or friends may escape the £100 interest threshold that can apply to gifts from parents, the broader aim should be to choose a structure that keeps the child’s long-term savings tax-efficient and accessible when appropriate.
Overall, gifting money to grandchildren can be a powerful way to support their financial future, but families should be mindful of the tax implications, especially when cash is placed in a child’s savings account. Exploring tax-advantaged wrappers such as Junior ISAs, or considering alternatives like Premium Bonds, can help preserve more of the gift’s value for the child over the long term. The landscape is evolving, with savings interest tax rates set to rise in 2027, and savers should consult up-to-date guidance to choose the best option for their circumstances.