Children (under 18s) can earn up to £11,500 in the current tax year and pay no income tax. This is the maximum that can be earned during 2017-18 and will include earnings from all sources subject to income tax. The most common are:
- Income from employment
- Income from self-employment
- Bank interest and dividends received – although see comments below.
If you are aged 16 and over you may have to pay National Insurance if earnings with a single employer exceed £157 per week.
Parents are advised that if they gift shares in family companies to their under 18s children and then pay dividends on the gifted shares - with the aim of taking advantage of the annual tax-free dividends allowance and the possible lower rates of tax payable by the children - this strategy is unlikely to work as HMRC would seek to treat the dividends as if they had been received by their parent(s).
Once a child reaches the age of 18, then gifting shares in a family company to divert dividends from parents to the child would be possible. A word of caution however, this area of taxation is littered with anti-avoidance regulation so before transferring or issuing new shares, professional advice should be taken.
Parents also need to be clear that if they employ their under 18s in their business, then they need to pay a commercial rate for the job involved. Paying more than market rates would likely attract the attention of HMRC.
Children under 18 years are entitled to claim the annual capital gains tax exemption of £11,300 for 2017-18, but only on the chargeable disposals of assets in which they have a legal title.
The under 18s can save in a tax-free fund by investing in a Junior ISA. The savings limit in these schemes for 2017-18 is £4,128. Parents can open an account but the money invested belongs to the child.
Children can take charge of the investment from age 16 but cannot withdraw funds until they reach 18 years.