Junior ISAs (JISAs) are tax-free savings accounts for children up to the age of 18. Like ISAs for adults, any savings or investments in a JISA earn tax-free (or largely tax-free) returns.
JISAs were launched on 1 November 2011 and replace the government's Child Trust Funds (CTFs). Any child born on or after 3 January 2011 and older children who did not qualify for a CTF are entitled to have a JISA, but unlike CTFs they will not receive any free government cash. Children who already have a CTF can keep their CTF but cannot open a JISA and cannot transfer their CTF to a JISA under the current rules (but see 'Changes on the way' below).
JISAs work just like other ISAs except the maximum annual contribution level for 2013/4 is £3,720. Family and friends can contribute to a child's JISA but only the child's parents or guardian can open the account for them.
There are two types of JISAs - cash JISAs and stocks and shares JISAs.
- Cash JISAs are just like savings accounts where you pay money into an account and it earns interest.
- Stocks and shares JISAs can hold shares, bonds and investment funds.
A child's annual JISA allowance can be spread across both types of JISAs but the overall investment for the tax year must not exceed the maximum allowance. For example, in the 2013/4 tax year you could save £1,000 in a cash JISA and £2,720 in a stocks and shares JISA for a child.
If a child has two JISAs they can transfer money between them but they can't transfer money from a JISA to an adult ISA.
Money saved in a JISA cannot be taken out until the child is 18 and then it is the child rather than a parent or guardian who has access to this cash. The only exception is if the child becomes terminally ill or dies and then a parent or guardian can access the money.
Children are not allowed to manage their own JISAs until they are 16. When a child reaches 16 they can open their own JISA and they can also open a tax-free cash ISA if they wish, so they could then have a JISA and a cash ISA. The minimum age for a stocks and shares ISA is 18.
Once a child is 18, their JISAs become ordinary ISAs. This means all the money that has been built up in JISAs can automatically be tipped into another tax-free environment. If the money had been in ordinary savings and investment accounts, once the child was over 18 they might not have been able to shelter all this money in a tax-free environment. For more on how much you can save and invest in adult ISAs see our cash ISA guide and stocks and shares ISA guide.
JISAs are available from banks, building societies, credit unions, friendly societies, stockbrokers and fund managers.
JISAs may be 'tax-free' (or largely tax-free) but that doesn't mean they offer better value for money than other savings and investment products.
Like adults, every child has their own capital gains tax (CGT) and personal tax allowance. Your annual CGT allowance (£10,900 for the 2013/4 tax year) is the amount of profit you can make from disposing of assets before you have to pay any CGT .
The personal tax allowance (£9,440 for the 2013/4 tax year) is the amount of income you can earn before you have to pay income tax So assuming a child has no other income (and most don't) they can earn up to £9,440 in interest before they have to pay any tax. So if a savings account is offering a higher rate of interest than a cash JISA, and regular savings accounts for children often do, then this is likely to be a better option.
With an ordinary savings account, to ensure children receive tax-free interest on their savings, a parent or guardian needs to complete form R85 which is usually available from the savings account provider.
Where JISAs can make a difference is when a child reaches 18 they can automatically pour any cash from a JISA into an ISA. Their savings will then continue to earn tax-free interest whereas in a standard savings account they would be subject to tax once the young adult starts to have an income.
JISAs can also make a difference if a parent or step-parent invests money for their child and the investment earns more than £100 a year in income. If the money is in a JISA returns are tax-free. But if the investment is not in a JISA, this could result in the parent paying income tax at their marginal rate of tax on the child's income.
Changes on the way
From April 2015 it will be possible to switch a Child Trust Fund to a JISA.