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From the 6 April after they turn 16, children have to re-register R85s otherwise (often without any warning from the bank or building society) their savings will start being taxed.

Introduction

If you have savings and your total income does not exceed your annual personal allowance (the basic allowance being £6,475 for the 2010/11 tax year), you can register with the bank or building society to have interest added to your account without tax deducted.

You register at the bank or building society using form R85  (an accompanying helpsheet  is available to help work out whether or not you are a non-taxpayer).

Children

The same principle applies for children. They each have their own personal allowance, so generally they can receive savings income tax-free (unless the income comes from money gifted to them directly or indirectly by a parent, in which case it is taxable on the parent if it is over £100 a year).

Example

Jane is under 18 and not married or in a civil partnership. Her grandparents put some money into a savings account for her which generates interest of £250 in a year. She has no other income, so this can be paid tax-free.

Jane’s parents go into the bank and sign form R85 on her behalf (if Jane had more than one account, an R85 would be needed for each).

But, when a child turns 16…

At the end of the tax year in which the child reaches age 16, the R85 will expire.

Therefore in the example above, Jane will have to sign a new R85 (assuming she is still eligible to receive interest without tax deducted). So, say Jane’s 16th birthday falls on 10 August 2010 – the R85 will expire on 5 April 2011 and she will need to sign a new one to take effect from 6 April 2011.

Unfortunately, there is often no warning from the bank or building society that the existing R85 has been automatically revoked and this will not become apparent until someone notices tax deducted from the interest (£50 at the current basic rate of 20% would be deducted from the £250 interest).
 
If this is not spotted before the end of the tax year, an R40  repayment claim will need to be sent to HMRC to reclaim the tax deducted. If however a new R85 is registered before the end of the tax year, the bank or building society may also be able to repay any tax already taken off earlier in the year.

Keep an eye out

The key message is to make sure you always keep R85s under review, as their registration usually remains in place indefinitely unless you withdraw them – the above example being one exception. So when are some of the other times that you need to be aware of R85 implications?

• Students might have registered R85s while they are at college, say, but forget to withdraw them when they start work and earning over their personal allowance.

• Sometimes people invest in fixed period ‘bond’ type accounts and new R85s need to be completed when they mature and are reinvested in new accounts.

• When circumstances change for other reasons – for example if you are widowed or are a surviving civil partner, you might need to check whether you should withdraw existing R85s if you have inherited extra pension income. 

• On retirement – you might become a non-taxpayer and then be entitled to register R85s. 

The Child Trust Fund – going, going… but not quite gone

Note that there are other options when considering savings for children.

You have to be 16 or over to invest in a tax-free Individual Savings Account, but you can for example consider Children’s Bonus Bonds from National Savings & Investments; or even pension savings for children if you want to make sure they cannot touch the money for a long time!

And although it is in the process of being phased out, the Child Trust Fund is still around for the time being. You may still be able to add up to £1,200 to existing accounts which will accrue interest tax-free.