Many parents diligently saving for their children may be unaware of a tax rule that could affect them. The so-called '£100 rule' stipulates that if a parent gifts money to their child and the interest earned exceeds £100 in a tax year, HM Revenue and Customs (HMRC) treats that interest as the parent's income, not the child's. This means it is taxed at the parent's rate, potentially leading to an unexpected tax bill.
How the £100 Rule Works
The rule applies per parent, per child. If both parents contribute separately, each has a £100 allowance before the rule kicks in, totalling £200. However, if contributions come from a joint account, HMRC assumes a 50:50 split. The £100 threshold has not changed in years, while savings rates have risen. With children's savings accounts offering around 4-5% interest, a gift of roughly £2,000 to £2,500 can trigger the rule.
Grandparents Are Exempt
Money gifted by grandparents, aunts, uncles, or family friends is not subject to the £100 rule. Instead, it is taxed as the child's income. Children have their own tax allowances, including a Personal Savings Allowance of up to £1,000 for basic-rate taxpayers or £500 for higher-rate taxpayers. Non-taxpayers can earn up to £18,570 in savings interest tax-free. This makes gifts from grandparents more tax-efficient than those from parents.
HMRC advises parents to keep records showing which contributions came from grandparents, in case proof is needed.
The Easy Solution: Junior ISAs
A Junior ISA (Individual Savings Account) offers a straightforward way to avoid the £100 rule. Interest earned inside a Junior ISA is always tax-free, regardless of who contributes. Parents can pay in up to £9,000 per year across cash Junior ISAs, stocks and shares Junior ISAs, or a combination. This option is often the tidiest for regular gifting.
According to financial experts, most families saving modest amounts will not approach the £100 limit, but those with growing savings pots or rising interest rates should check their position. The rule is not about tax avoidance but ensuring parents are not caught out unnecessarily.
