Martin Lewis has warned those saving or investing for their children about a “hidden tax trap” that could trigger unexpected tax bills
Martin Lewis has sounded the alarm about a “hidden tax trap” that will affect many parents across the UK. The MoneySavingExpert founder outlined the details in a new instalment of The Martin Lewis Podcast on BBC Sounds.
He says mums and dads who invest or save on behalf of their children “need to know how it works” as the rule exists to prevent you “stuffing all your money in your kid’s name”. Martin Lewis said: “Parents, I’ve got a warning for you. There’s a hidden tax trap if you’re investing or saving for your children.”
He explains that if a child generates more than £100 annually in interest or dividends from funds specifically gifted to them by their parents or step-parents, that income is subject to taxation at the parent’s marginal tax rate. If the parent is liable for tax on their own savings or investment dividends, the child will similarly be taxed on those funds, reports the Mirror.
He told listeners: “Now, most under-18s don’t usually pay tax, not because there are special rules for them, but because, like adults, they can earn £12,570 per tax year, usually, without paying any income tax on it. And most kids don’t do that. It would be a hell of a paper round.
“But on money specifically given by parents or step-parents, not grandparents, aunties, uncles or others, if your child earns over a hundred pounds a year of interest or dividends from it, then that is taxed at the parents’ marginal tax rate. So, if the parents are paying tax on their savings or investment dividends, then the child will too.”
Martin Lewis recommends utilising a Junior ISA, as any money held within one is entirely tax-free, even if it was originally contributed by the parents. He also notes that this helps shield the child from capital gains tax.
“Now most parents don’t pay tax on savings,” he said. “Either because you’ll know you have the personal savings allowance, which for a basic rate taxpayer means you can earn £1,000 a year of interest without paying tax on it.
“But in the event that you do pay tax, they will pay tax. And this is one of the reasons a junior ISA would come into its own, because money inside a junior ISA is always tax free, even if the parents have given the money. It’s locked away till they’re 18.”
The majority of parents are not liable for tax on their savings owing to the personal savings allowance, meaning this “trap” only becomes a concern if they are already being taxed on their own savings or investment dividends. Crucially, this particular tax rule applies solely to money gifted by parents or step-parents, and not to contributions made by grandparents, aunts, uncles, or any other relatives.
Martin Lewis said: “If you’re saving and investing and you may pay tax, take a look at a junior ISA. It will also help protect your children from capital gains tax if their investment returns do well. And for much more info on investing and saving for your children, the best ways to do it, the best buys and best funds, have a listen to this week’s podcast.”
What is a Junior ISA?
Junior Individual Savings Accounts (ISAs) are long-term, tax-free savings accounts for children. In the 2026 to 2027 tax year, the savings limit for Junior ISAs is £9,000. To get a Junior ISA, your child must be under 18 and living in the UK.
There are two types of Junior ISA. The first is a cash Junior ISA, for example, you will not pay tax on interest on the cash you save. The second is a stocks and shares Junior ISA, for example, your cash is invested, and you will not pay tax on any capital growth or dividends you receive.
Your child can have one or both types of Junior ISA. Parents or guardians with parental responsibility can open a Junior ISA and manage the account, but the money belongs to the child. The child can take control of the account when they’re 16, but cannot withdraw the money until they turn 18.
