A child is a taxpayer in their own right, but income from money a parent gives them is taxed as the parent’s income once it exceeds £100 in a tax year from that parent. Junior ISAs sidestep this rule: income inside a Junior ISA is exempt from income tax, and section 694(1A) of the Income Tax (Trading and Other Income) Act 2005 extends that exemption to income that would otherwise be treated as the parent’s. For 2026 to 2027 up to £9,000 can be paid into a child’s Junior ISAs.

How is a child’s savings income normally taxed?

Interest on an account in a child’s name is the child’s income, set against the child’s own allowances, including the standard Personal Allowance of £12,570 for 2026 to 2027. Most children have no other income, so interest from gifts by grandparents, godparents or the child’s own earnings is usually tax free in practice.

The exception is money that came from a parent. HMRC’s Savings and Investment Manual at SAIM2430 says interest on an account held by an unmarried person under 18 is treated as the parent’s income if the money was a gift from the parent and the interest exceeds £100. The gift itself counts as a settlement for tax purposes.

What is the parental settlement rule?

Section 629 of the Income Tax (Trading and Other Income) Act 2005 treats income arising under a settlement as the income of the settlor, and the settlor alone, if it is paid to or for the benefit of, or would otherwise be treated as income of, a relevant child of the settlor. A relevant child is a minor, meaning under 18, who is unmarried and not in a civil partnership. Child includes a stepchild.

The key features, from the statute and HMRC’s Trusts, Settlements and Estates Manual:

  • The £100 test is per parent, per child, per tax year. Section 629(3) disapplies the rule only if the child’s relevant settlement income from that parent does not exceed £100. TSEM4310 shows that if one parent’s gifts produce £80 and the other parent’s produce £120, only the £120 is taxed on the second parent.
  • It is not a tax free slice. Once income from one parent’s gifts exceeds £100, all of it is taxed on that parent, not just the excess. TSEM4310’s example treats the whole £105 as the father’s income.
  • It applies to more than cash. TSEM4300 applies it to dividends on family company shares given to children, and to income of a bare trust for a minor even if the income is kept in the trust.
  • Indirect gifts are caught. TSEM4300 gives an example where a grandparent’s gift of shares was really arranged by the parent, so the parent was treated as the settlor.

Income attributed to a parent is taxed as part of the parent’s own income, so it may be covered by their Personal Savings Allowance or, for dividends, the dividend allowance, but it uses those allowances up.

Why do Junior ISAs sit outside the rule?

ISA income is exempt from income tax under regulations made under section 694. Section 694(1A), inserted by Finance Act 2011, says the income covered by those regulations includes income treated as an individual’s by virtue of section 629. In other words, even if Junior ISA income would otherwise be the parent’s, it stays exempt.

HMRC’s guidance for Junior ISA managers states the result directly: income arising from parental subscriptions to a Junior ISA does not count towards the parent’s income under the settlements legislation. A parent can therefore pay up to the full annual limit without any parental tax charge on the interest, dividends or growth. Child Trust Funds give a similar result; GOV.UK says there is no tax on Child Trust Fund income or profits.

How do Junior ISAs work?

  • Eligibility. The child must be under 18 and living in the UK, unless a parent is a Crown servant overseas and the child depends on them.
  • Types. A child can have one cash Junior ISA and one stocks and shares Junior ISA.
  • Limit. The total paid into both in 2026 to 2027 cannot exceed £9,000. Income and growth inside the account do not count, and unused allowance cannot be carried forward.
  • Who opens it. Only a parent or guardian with parental responsibility can open one for a child under 16; children aged 16 and 17 can open their own.
  • Who can pay in. Anyone. The manager must make clear that every payment is a gift to the child and cannot be returned.
  • Control. The person who opens it is the registered contact and manages it. The child can take over at 16 but cannot withdraw until 18, except on terminal illness.
  • Transfers. A child cannot hold both a Child Trust Fund and a Junior ISA, but the fund can be transferred into a Junior ISA. Money cannot move between a Junior ISA and an adult ISA.

At 18 the Junior ISA automatically becomes an adult ISA and the money is the young person’s to spend. Adult ISA rules then apply; see ISA tax rules. The restriction on stocks and shares ISAs made up entirely of money market funds, due from 6 April 2027, will not apply to Junior ISAs.

What happens if a child is terminally ill or dies?

The registered contact can withdraw money early if the child is not expected to live more than six months, using HMRC’s terminal illness early access form. In England and Wales this must be done within six months of diagnosis and in Northern Ireland within 12 months; Scotland has no time limit. If a child dies, the Junior ISA money is paid to whoever inherits the child’s estate, and the provider closes the account.

How do the numbers compare?

Illustration only. A mother gives her 10 year old son £5,000 for an ordinary savings account paying 4%, and his grandfather gives him another £5,000 for a second account at the same rate. Each produces £200 of interest a year.

Money Interest Taxed on
Mother’s £5,000 in ordinary account £200 Mother, all £200, as it exceeds £100
Grandfather’s £5,000 in ordinary account £200 Son, covered by his Personal Allowance
Mother’s £5,000 in a cash Junior ISA instead £200 Nobody, exempt

If the mother were a higher rate taxpayer who had already used her Personal Savings Allowance on her own savings, the ordinary account would cost her tax on the full £200 each year. Putting the same gift into the Junior ISA removes the charge entirely.

What mistakes should parents avoid?

  • Assuming the first £100 is always tax free. Once the limit is passed, the whole amount is the parent’s.
  • Using feeder accounts without thinking. HMRC’s guidance says a feeder account holding money waiting to go into a Junior ISA is not a Junior ISA and is taxed like any other child’s account, so the £100 rule can apply.
  • Giving family company shares to minor children; HMRC treats the dividends as the parent’s.
  • Paying more than £9,000 across both Junior ISAs; providers check only their own accounts.
  • Forgetting the money belongs to the child at 18 and cannot be reclaimed.
  • Overlooking inheritance tax: HMRC’s guidance says gifts by parents to a Junior ISA are treated like any other gift they make.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.