5 Ways to Use Your Children’s Tax Allowances to Reduce Your Tax Bill
Chrissy Leach • 24 March 2025
Tax efficiency is an important part of financial planning, and one often-overlooked strategy involves making use of your children’s tax allowances. If structured correctly, you can legally reduce your tax bill by shifting income or assets to your children while staying within HMRC guidelines.
Understanding Children’s Tax Allowances
In the UK, children are entitled to the same tax-free personal allowance as adults. For the 2024/25 tax year, this stands at £12,570. This means that if a child receives income below this threshold, they won’t pay income tax. Additionally, children can benefit from savings allowances, capital gains tax exemptions, and Junior ISAs to grow their wealth tax-free.
Ways to Utilise Your Children’s Tax Allowances
1. Setting Up a Junior ISA (JISA)
Parents and grandparents can contribute up to £9,000 per tax year into a Junior ISA for a child. The income and gains from these investments are tax-free, providing a great way to build up tax-efficient savings for their future.
2. Gifting Assets to Children
Transferring income-generating assets such as shares or property to your child can allow income to be taxed at their lower rate. However, HMRC rules state that if parents gift assets to their children and the income exceeds £100 per year, it will be taxed as the parent’s income. This rule does not apply to gifts from grandparents.
3. Using Trusts for Tax Planning
A discretionary or bare trust can help transfer assets to children while potentially reducing inheritance tax (IHT) liability. A bare trust allows income to be taxed at the child’s rate, while a discretionary trust gives trustees control over distributions.
4. Paying a Salary to Your Child
If you own a business, employing your child in a legitimate role can be an effective way to utilise their personal tax allowance. The salary must be reasonable for the work performed and comply with minimum wage laws. Payments below the thresholds mean no income tax or National Insurance contributions are due.
5. Capital Gains Tax (CGT) Allowance
Children also have an annual capital gains tax allowance (£3,000 for 2024/25). If you gift them assets that appreciate in value, they can sell them and use their CGT allowance, potentially saving tax compared to selling the assets yourself.
Key Considerations and HMRC Rules
1. The £100 income rule applies to parental gifts, but not to gifts from other family members.
2. Gifts to children must be genuine and without strings attached.
3. For business payments, children must be employed in a genuine role with reasonable compensation.
4. Trusts can be complex and may have tax implications, so professional advice is recommended.
Conclusion
Utilising your children’s tax allowances can be a smart way to reduce your tax bill while securing their financial future. However, it’s crucial to comply with HMRC regulations to avoid unintended tax consequences.
At CJL Accountancy, we can help you structure your finances efficiently and legally. Get in touch with us today for tailored tax planning advice!
Many business owners underestimate the real cost of employment beyond the salary they agree to pay
Learn how to read rental accounts and identify the key figures every UK landlord should monitor.
Learn how to read self-employment accounts and identify the key figures every UK sole trader should monitor.
Learn how to read limited company accounts, understand FRS 105 and FRS 102 Section 1A, and identify the key figures every UK company director should monitor.
A UK Chartered Accountant’s Guide for Business Owners and Taxpayers
With anyone able to call themselves an accountant in the UK, choosing a Chartered Accountant gives you greater protection, expertise, and peace of mind.
Confused about Making Tax Digital? Here’s whether you really need an accountant, and how to stay compliant without the stress.
If you’ve been asked to pay tax in July, it’s likely a payment on account. Here’s how it works, how it’s calculated, and what to do if you can’t pay.
MTD ITSA first quarterly update explained for UK sole traders and landlords. Deadlines, what to file, and how CJL Accountancy can help.
The UK government has increased the statutory mileage rates from 6 April 2026 - here’s exactly what it means for you.
