If you’ve been diligently squirrelling away cash into your child’s savings account, there’s a chance the taxman has been quietly eyeing it up too
Here’s a little gem of a rule that catches out a surprising number of well-meaning parents, and I’d put money on most of you never having heard of it.
If you’ve been diligently squirrelling away cash into your child’s savings account, there’s a chance the taxman has been quietly eyeing it up too. But if grandma or grandad have been doing the saving instead, they’re completely off the hook.
Let me explain.
The rule nobody tells you about
It’s called, rather unglamorously, the “£100 rule” – and here’s how it works.
If you, as a parent, gift money to your child and the interest that money earns comes to more than £100 in a tax year, HMRC doesn’t treat that interest as your child’s income. It treats it as yours. All of it, not just the bit over £100. Which means it gets taxed at your rate, not theirs.
This isn’t some obscure loophole HMRC is quietly enforcing behind closed doors, either. It’s official policy, designed to stop parents from parking their own savings in their children’s names purely to dodge tax. Fair enough in principle.
The trouble is, the £100 threshold hasn’t budged in years, while savings rates certainly have. With decent children’s savings accounts now paying somewhere around 4 to 5%, it really doesn’t take much to tip over that limit.
We’re talking roughly £2,000 to £2,500 gifted by a parent, depending on the rate. That’s not exactly a fortune these days!
It applies per parent, per child
There’s a bit of nuance worth knowing if you’re a couple. The £100 limit applies per parent, per child, not as a single household total. So if you and your partner each pay money into your child’s account separately, you effectively get £100 each before it becomes an issue, £200 in total.
Handy to know if you’ve got more than one child and are trying to keep things efficient. Just bear in mind that if you’re paying from a joint account, HMRC assumes the money is coming 50:50 from each of you.
Enter the grandparents
Here’s the really useful bit! This whole rule only applies to money that comes from parents and step-parents. Money gifted by grandparents, aunts, uncles, family friends, anyone else, doesn’t count towards that £100 limit at all.
It’s simply taxed as your child’s own income, and children get their own allowances just like adults. You get a Personal Savings Allowance worth £1,000 a year for basic-rate taxpayers or £500 for higher-rate.
If you’re a non-taxpayer – that is you have less than £12,570 income per year, you may be able to earn as much as £18,570 in savings interest tax-free.
In practice, that means most children’s savings interest ends up completely tax-free, as long as it isn’t a parent doing the gifting.
So if your child’s grandparents are keen to help build up a savings pot for them, birthday money, Christmas contributions, or a regular top-up, that’s not just generous, it’s genuinely more tax-efficient than you doing the same thing yourself.
Worth mentioning next time the subject comes up over Sunday lunch. It’s one of the best investments grandparents can make for their grandkids in 2026!
One practical tip, HMRC has said parents should hang onto some record showing which contributions came from grandparents rather than from you, just in case you ever need to prove where the money came from.
The easy way round it
If you’d rather not rely on rope-in-the-grandparents as your tax strategy, there’s a much simpler fix- a Junior ISA .
Interest earned inside a Junior ISA is always tax-free, no matter who put the money in, parent included. You can pay in up to £9,000 a year across a cash Junior ISA, a stocks and shares one, or a combination of both, and none of it triggers the £100 rule.
If you’re regularly gifting your child meaningful sums, this is usually the tidiest option going.
None of this is about clever tax avoidance schemes or anything remotely dodgy. It’s simply about knowing the rules well enough not to get caught out by them unnecessarily.
Most families saving modest amounts for their children will never come close to the £100 limit and have nothing to worry about. But if your child’s savings pot has grown nicely, or interest rates keep doing what they’ve been doing lately, it’s worth doing a quick sum to check where you stand.
And if the grandparents ask what to get the grandchildren this birthday, you now know the tax-smart answer!
- This article is for general information and isn’t personal financial or tax advice
