Back to school: everything you need to know about children’s finances

With your children (or grandchildren) going back to school after the long summer holiday, you might find you have a little bit more spare time. With the back-to-school vibe in the air, here are all the financial-related freebies, limits and allowances that you need to know about for your child.

Get free childcare

If your child is pre-school age, then it’s highly likely that you will be entitled to some free hours of childcare for them.

As of September 2024, those aged nine months to three years will get 15 hours a week of childcare, while three to four-year-olds get up to 30 hours a week for free, which can be used at nursery or childminders. The hours are only for term-time, so 38 weeks of the year.

To be eligible both parents must be working and earning at least £183 a week each. However, parents of nine-month-olds and older lose all their free hour entitlement when either of them earns more than £100,000 (minus any pension contributions). For parents of three and four-year-olds the free hours entitlement drops from 30 hours to 15 hours a week once either parent earns more than £100,000.

You must actively claim the free hours through the government gateway, rather than being automatically awarded. You can also only claim from the start of the term after your child reaches the eligible age. For example, if they turn nine months at the start of October you won’t be able to claim until January. If you haven’t applied by the start of the term, you must wait until the next term to claim it.

Tax-free childcare

Another way to reduce childcare costs is through tax-free childcare, which gives you up to £2,000 a year (per child) off childcare costs for eligible parents. You need to open an account with the government.

For every £8 you pay into the account the government will add £2, up to £500 a quarter.

As with the funded hours above, parents must be working and earning the minimum wage for 16 hours a week or more, but earning less than £100,000 per parent. Once you hit the £100,000 earnings threshold you can’t use any tax-free childcare.

The benefit of this scheme is that it can be used up until the child is 11 and can be used for breakfast clubs, after-school clubs and holiday camps, so long as they accept it. If your child is disabled, you get the entitlement up to the age of 16 and can claim up to £4,000 a year.

Child benefit

Another bit of support from the government is child benefit, which is worth £2,212.60 a year for a parent with two children. The criteria for child benefit recently changed, which means that parents are eligible for some payment until they earn £80,000 or more (previously the limit was £60,000). Any parents who earn less than £60,000 will be entitled to the full amount, while those who earn more will lose 1% of the child benefit amount for every £200 they earn over £60,000, before all the benefit is wiped out at £80,000 of earnings or more.

You need to actively claim child benefit, it’s not automatically given to you. Even if you’re not eligible because you earn too much, it can be worth claiming child benefit and not getting the actual monetary benefit, because it also gives you National Insurance credits, which count towards your state pension eligibility. If one parent is not working, and not building up these credits through their work, then it’s worth claiming.

Junior ISA

If you want to put some money away for your children then the good news is that you can save up to £9,000 a year into an ISA for them, per child. The money is tied up until the child is 18, when it converts to an adult ISA, and they can access the money.

There are both cash and stocks and shares Junior ISAs available, with many parents opting for the cash option. However, given the long-term investment horizon most children would have, it makes a lot of sense for parents to consider the stocks and shares route.

You can get grandparents (or other friends and family) involved too. A parent or guardian must set up the account, but after that anyone can contribute. You could even encourage the child to put some of the money they get from birthday or Christmas presents into their Junior ISA.

Tax on savings accounts

If you don’t opt for an ISA account and instead save money for your child in a standard children’s cash savings account, you need to be careful not to get tripped up by tax.

Most parents don’t expect to be hit with a tax bill if they save for their children, but a little-known rule means the taxman could take some of the interest from their child’s savings. Once a child earns £100 or more in interest on their savings account on money that’s been gifted by parents, it’s taxed as though it’s the parent’s money.

Now interest rates are higher, you don’t need to have a huge amount in savings to reach that crucial £100 limit. If the account is paying 5% you only need to have £2,000 saved to hit that limit. Read more on this topic.

Child Trust Funds

People with older children might have child trust funds for their kids – and often they will have forgotten about them.

Any child born between 1 September 2002 and 2 January 2011 would have been eligible for a child trust fund account, and while the government only paid £250 into the first accounts (or £500 for low-income families), it could have grown in that time.

If you haven’t already got details of the account, you should track it down. You can go to gov.uk and fill in a form to trace the money, although you need a government gateway ID.

Once you’ve tracked down the money you can work out what to do with it. For many people it will make sense to transfer it to a Junior ISA, where the charges will likely be lower and you’ll have a much bigger investment choice.

If you’re transferring the child trust fund you need to move over the entire sum of money to a Junior ISA, you can’t have both types of account open at once. But helpfully the amount you transfer won’t count towards your annual Junior ISA limit. This means that you can transfer the entire child trust fund into a Junior ISA and still add up to £9,000 to it in the same tax year.