Everyone has to pay tax at some point, so it's essential to explain to your child what tax is, and why it’s important. What’s more, under 18s can be liable for income tax payments. The good news is this rarely happens because children don't tend to earn over the tax-free threshold. Yet, with our latest Youth Economy Report showing that over a third (34%) of GoHenry kids have a part-time job of some description. Here's what you and your child need to know about income tax and under 18s.
Related: How to make money as a teenager
Do under-18s pay taxes in the UK?
Under-18s only pay tax and income tax if they earn more than £1,042 a month (over £12,570 a year), which is the current personal tax-free allowance for everyone. And kids only need to pay National Insurance once they are 16 years old. National insurance is a tax which entitles you to things like the state pension and statutory sick pay.
Related: How to explain taxes to kids
Does tax differ if you're employed or self-employed?
Tax does differ depending on whether you work for someone else or yourself. If, for example, your child works for a supermarket and earns more than £1,042 a month, the tax will be taken at source as PAYE (pay as you earn). This means national insurance and income tax will automatically be taken from their pay before they are paid.
If your teen has a small business idea, such as selling jewellery or cakes, then they are self-employed. If they earn over their personal allowance, they must declare this to HMRC through self-assessment and pay tax at the end of every tax year (April to March).
How much can a child earn before paying tax in the UK?
Personal allowance for income tax
Income tax is related to earnings, not age, so the personal allowance (the amount of money you're allowed to earn each tax year before you start paying Income Tax) for adults and children for 2022/23 is £12,570 a year.
National insurance minimum income
If your child is 16 or over and an employee earning above £242 a week, they will have to pay class 1 NI payments.
Class 2 NI payments are paid by those 16 who are self-employed and making a profit of more than £11,908 a year.
Personal savings allowance
The personal savings allowance (PSA) is a tax-free allowance. It means you can earn interest on your savings without paying tax on that interest. The allowance you get depends on the income tax you pay: Basic-rate (20%), taxpayers: can earn £1,000 in savings interest per year with no tax.
There's usually no tax to pay on children's savings accounts. You only need to tell the HMRC if your child earns more than £100 in interest from money given to them by a parent. This is because HMRC assumes the money still belongs to you, and you will be taxed on the interest that the money in your child's bank account earns.
The £100 interest limit doesn't apply to money:
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given by grandparents, relatives or friends
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in a Junior ISA
The savings starter rate
The savings starter rate is 0% on £5,000. The rate applies to the first £5,000 of taxable income (after your personal allowance), which is savings income.
Related: How to save money as a teen
How to register your child with HMRC for taxes
Your child does not have to register with HMRC unless they earn over the personal allowance threshold.
Do children pay income tax on their savings?
Children are liable to pay taxes on their savings, but their savings don't usually earn enough interest to exceed the tax threshold, so they rarely do.
Do parents pay tax on earnings from their child's savings?
If a child gets more than £100 in interest from money given by you or another parent, then you will have to pay tax to the HMRC on all the interest above your personal savings allowance.
Tax-free saving account options for under-18s
A GoHenry Stocks and Shares Junior ISA is a tax-free way to build a lump sum for your child. Money earned from trading investment funds, stocks, or bonds within a Stocks and Shares Junior ISA is tax-exempt up to the annual limit.
For informational purposes only.
The information provided is not intended to be investment, tax or legal advice - nor does it claim to be comprehensive. Speak to a professional, if you're unsure about whether investing is right for you. We do not endorse any third parties referenced.
Capital at risk. The value of your investment can go down as well as up, and past performance is not a guarantee of future results. Tax treatment depends on your individual circumstances and may be subject to change.
Junior ISA rules and T&Cs apply. Investment services provided by gohenry Family Finance Limited, an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority: (FRN: 574048).
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