A Junior ISA (Individual Savings Account) is a tax free method of saving for a child. The tax allowance for a child in the tax year 2016/17 is £4,080. Any Monies earned from this type of investment, up to this amount, is therefore free from income tax or capital gains tax. It is important to note that access to the funds in a Junior ISA cannot be accessed until the child reaches the age of 18.
Junior ISA accounts allow parents to contribute up to £4,080 every year (as of the 2016/17 tax year) into the account and is designed specifically to incentivise tax-free saving for the child’s future. This may be in the form of either a cash ISA or a 'stocks and shares' account and offers your child the opportunity to have an account which is sheltered from all income and capital gains taxes. In this way, it works similarly to adult ISA savings accounts.
The account will become a regular adult ISA account when the account holder turns 18 (the funds in the account will remain tax-free, as is the norm with all adult ISA accounts), at which time the account holder withdraw balance as they see fit.
However, the account being tax-free doesn't mean that you should open the first account you see. Interest rates and benefits will still differ from provider to provider, so it is vital that you compare Junior ISAs to find the best deal.
If you have already set up a Child Trust Fund for your child, you cannot open a Junior ISA in their name. You cannot transfer existing savings from a Child Trust Fund into a Junior ISA either. You may only have one type of each Junior ISA for your child. You may have two accounts in that you have opened: one for cash and one for stocks and shares. However, the total maximum amount split across the two account cannot exceed the maximum amount of £4,080.
For instance, if you were to open two accounts, one for cash and one for stocks and shares, and you were to deposit £3,000 into the cash ISA, you would only be allowed to deposit £1,080 into the stocks and shares account in that tax year.
A Junior ISA account can only be opened by the parent or legal guardian of a child, although money can be deposited into the account on behalf of your child from anyone. Grandparents, aunts & uncles may all contribute to the account, however, only the legal guardian of the account holder may open it on their behalf.
While adult ISAs allow you to hold more than one of each type of ISA account, giving you the freedom to contribute to each new account every tax year, this cannot be done with Junior ISAs. However, you are free to change your ISA account provider every tax year to ensure you're receiving the best rates on your savings.
It is not possible to hold both a Junior ISA and a Child Trust Fund account for the same child. Junior ISAs may only be opened for children who did not qualify for the Child Trust Fund.
You cannot currently transfer your existing Child Trust Fund to a Junior ISA account, however, there have been talks to make this possible and may well be changed in the near future.
The funds in a Junior ISA account may only be withdrawn by the account holder (the child the account was set up for), and due to regulations, this can only happen when they turn 18.
The management and overview for the account will be maintained by the legal guardians until the account holder turns 16. At this time the account holder will assume responsibility for the account, but won’t be able to withdraw funds from the account until they are 18. Only once the child turns 18 are they free to withdraw the funds from the ISA and do with it what they see fit; it may be that the account holder wishes to continue saving with an ISA account by leaving the money in the account.