One considerable change to the way parents can set money aside for their children’s futures may have escaped your attention over the last couple of months: the annual Junior ISA allowance has been effectively doubled, from £4,368 to £9,000, and we thought you might find this helpful to know. This means parents can now save twice as much for their children, starting this tax year, free from tax on income and gains.
What is a Junior ISA?
The Junior Individual Savings Account (JISA) was added to the ISA family in 2011 as an alternative to the now-defunct Child Trust Fund. It works in a very similar manner to the standard ISA for over-18s, in that it provides a protective wrapper for an individual’s savings and investments, so that growth and income are shielded from tax.
As you may already know, the annual limit for saving into an ordinary ISA is £20,000. The main difference with the JISA is the lower annual subscription limit, though this latest change has considerably narrowed the gap between the two.
Robertson Baxter Independent Financial Adviser Antony Barton explained that JISAs are “a great, tax efficient way of passing money onto your kids and starting a savings pot for university, their first car or first home.”
JISAs are especially helpful for parents who have already maxed out their own personal tax allowances. Given that interest over £100 on savings made by a parent on behalf of a child is normally taxed as if it were the parent’s income, JISAs remove this liability, and at age 18 the account will automatically be converted into an ordinary ISA, preserving the tax benefits for the years to come.
Are there any drawbacks?
The main one is that parents cannot withdraw money from a JISA unless there are exceptional circumstances. Normally, only the child can access the money, and not until they turn 18.
What are the implications of a £9,000 JISA allowance?
Legislation and allowances change often, so it’s hard to give a definitive comparison of how your savings would have fared under the old limit vs. the new limit. However, to give you an illustrative example, if you were to invest the previous maximum into a JISA each year (£4,368), then assuming 4% annual investment growth after fees, your child would end up with a fund of £52,443 after 10 years.
If you were to invest £9,000 a year for 10 years under the same growth and cost assumptions, then the final fund would be worth £108,055, with around £9,000 of this larger pot coming from the additional investment growth generated by the higher contributions.
Of course, this is only for illustrative purposes; stock market investing puts your capital at risk and fund values can fall as well as rise, but it might be a useful option to consider if it suits your circumstances.
Find out more
If you want to learn more about JISAs, are considering opening one or wish to consider this new annual allowance for an existing JISA, feel free to get in touch, and one of our advisers will be happy to go over the options with you.