How children are taxed in the UK

1. Children have the same tax allowances as adults

Every child is entitled to:

• Personal Allowance: £12,570 (2024/25)

They pay no Income Tax until income exceeds this.

• Dividend Allowance: £500 (2024/25)
• Capital Gains Tax (CGT) Annual Exemption: £3,000 (2024/25)

Therefore a child can legally receive quite a bit of income tax-free.

1. Earnings from employment (e.g., working a job or for the family business)

If a child has earned income:

• It is taxed normally (subject to the personal allowance).
• If they earn below the NI thresholds , they usually pay no National Insurance.

They can be employed by a parent’s company, provided:

• The work is real
• Pay is age-appropriate
• Legal working hours are followed
• Payroll (PAYE) is run properly

1. The special rule: “Settlements Rule” for unearned income from parents

This is the key exception.

If a child receives unearned income (interest, dividends, rental income) from money given by a parent , then:

If it produces more than £100 income per parent per year,

the income is taxed as the PARENT’S , not the child’s.

This exists to prevent parents shifting investment income to children to avoid tax.

Applies to:

• Interest from savings funded by a parent
• Dividends from shares a parent bought for the child
• Income from property gifted by a parent

Does not apply if money comes from:

• Grandparents
• Other relatives
• Unrelated people
• The child’s own earnings
• Genuine gifts from parents that produce less than £100 income per year

1. Children and dividends from a family company

If a child owns shares , dividend tax depends on how they got the shares:

Allowed (child is taxed normally)

• Shares were genuinely purchased by the child (e.g., using their own earned income)
• Shares were gifted by grandparents
• Trust arrangements outside the settlements rules

Not allowed (parent is taxed instead)

• Shares were gifted by a parent and generate >£100 dividends per year

HMRC treats dividends as the parent’s income.

This prevents artificial shifting of company profits into children’s names.

1. Children and savings accounts (Junior ISA, etc.)

Junior ISA (JISA)

• All gains are tax-free
• No impact from the £100 parental gift rule
• Annual limit: £9,000

Ordinary children’s savings account

• Subject to the £100 rule (so interest over £100 from parental money is taxed as the parent’s)

1. Capital Gains Tax (CGT) for children

Children receive the same £3,000 CGT allowance.

CGT may apply if they sell:

• Shares they own
• Property they own (rare for minors)

Parents gifting assets to children for tax avoidance triggers anti-avoidance rules similar to the settlements rules.

1. Children and tax returns

Most children do not need a tax return unless:

• They have taxable income above the Personal Allowance
• They receive dividends or interest above limits
• They have investment income caught by the parental gift rules
• They run a business (more likely for the 16+ age group)
• They make capital gains above the exemption

Summary Table

Type of Income How It Is Taxed for a Child

Employment Normal taxation (uses their own allowances)

Savings interest from parent’s money Parent is taxed if >£100/yr

Savings from grandparents/others Child is taxed normally

Dividends from parent-gifted shares Parent is taxed

Dividends from child-owned shares Child taxed using their own allowances