Since its launch in 2011, the Junior ISA (JISA) has become one of the most effective ways to save for your child’s future, creating hundreds of children who are on track to become millionaires by their 20s. Here are three key reasons why it’s time to open a JISA before the end of the tax year.
The number of adults who have opened a Junior ISA for their children is growing. By the 2022/2023 tax year, around 1.25 million JISA accounts were subscribed to, rising from the 1.21 million accounts in the year prior.
Crucially, JISA savings appear to be paying dividends for young beneficiaries. Data shows that the 50 top child investors have amassed an average account value of £761,000, putting them on course to join millionaires’ row by their 20s.
Available to all children under 18 years of age, JISAs come with an annual tax-free allowance of £9,000 and can take the form of either a savings account as a Cash JISA or an investment account as a Stocks and Shares JISA.
Because you can begin saving in a Junior ISA as soon as your child is born, compounding your JISA investments throughout their childhood can lead to some impressive returns over time. But if you’re thinking about opening a JISA for your child, here are three key reasons why you should do it before the end of the tax year on April 5th:
1. Maximise Your Tax-Free Allowances
Both ISAs and JISAs are unique in that they have a tax-free allowance that allows you to save or invest without needing to pay capital gains tax, dividend tax, or income tax on the pot’s value. But the catch is that you must stick to your annual allowance limits.
While adult individual savings accounts come with a sizeable £20,000 annual tax-free allowance, Junior ISAs offer just £9,000. It’s for this reason that compounding your savings is the most important way to grow your child’s JISA nest egg.
Because of how tax year deadlines work, there are no rules against investing £9,000 for your child on the 5th April, as the tax year closes, and contributing an additional £9,000 on the 6th of April, when it reopens. This means that if you plan on contributing your tax-free allowance in full each year, it really could pay to get started immediately.
Crucially, getting started sooner rather than later opens the door to compounded returns on the savings or investments. Because Junior ISAs can’t be touched until your child turns 18, opening your account sooner rather than later means you have longer for your investments to appreciate in value.
The fact that the top 50 JISA holders in the country have an average account value of £761,000 despite limits on tax-free allowances shows the power of investing early, and by beginning saving before the end of the tax year, you have a greater chance of building a substantial nest egg for your child.
2. Anyone Can Help to Save
If you’re concerned about opening a Junior ISA earlier because you’re unsure about how much you can contribute for your child, one of the best advantages of JISA savings is that anyone can contribute on behalf of your loved ones.
Let’s say that you’re considering opening a Junior ISA ahead of the end of the tax year and that your child has their birthday in March. Some providers can facilitate you inviting friends and family to make a contribution to your child’s JISA to help make a substantial addition to their nest egg ahead of adulthood.
The amazing thing about compounded savings is that any contribution can become much larger over time, whether it’s invested or saved. For instance, if your parents wanted to contribute a one-off gift of £100 for your child’s birthday in their Junior Cash ISA when they’re born, an assumed annual interest rate of 3.6% would see their contribution become £189.01 by the time they reach 18 years of age.
Whereas, if that gift was put into a Junior Stocks and Shares ISA with Wealthify instead, the projected amount could be £626.64 by the time they turn 18 (of course, this is not guaranteed due to market performance, and they could get back more or less than this amount). Investing does come with more risk, but it could still be beneficial than saving money in the long run.
3. Easing the Strain on IHT
Another great reason to get started on saving in a JISA early is that this form of individual savings account can be particularly efficient when it comes to inheritance.
Whether you’re a parent seeking to be more proactive when it comes to building a tax-efficient inheritance for your child or a grandparent seeking to work with your children to make valuable contributions to your grandchildren’s JISAs, the investment tool works well when ensuring that your wealth is kept out of the hands of the taxman.
Putting money into a child’s Junior ISA is fine as long as it’s from your regular monthly income (not from ‘capital’ and as long as it’s not negatively impacting your finances to do so), without this impacting inheritance. The money will belong to the child and be accessible to them at 18.
Grandparents can also contribute up to their gift allowance of £3,000 per year into a grandchild’s Junior ISA. This allowance can potentially be split evenly between your children or grandchildren for fairness and can grow into a sizeable nest egg later on. If more money is contributed (while keeping below the £9,000 Junior ISA allowance cap), monetary gifts would be considered free from Inheritance Tax (IHT) after seven years have passed, as standard with gift giving in the UK.
Opening a JISA Before April
Whether you’re a parent or a grandparent, Junior ISAs are one of the best ways to invest in the future of your loved ones in a tax-efficient way.
Because of the merits of compounded investments, there’s no time like the present when it comes to saving for your children or grandchildren, and with many JISA holders in the UK already on course to become millionaires in their 20s, the approach is a proven way to set youngsters up for adult life.
By keeping an eye on your annual allowances to ensure that you’ve budgeted each tax year effectively, it can be easy to save for the future of the next generation in a way that eases your Inheritance Tax burdens and encourages more family members to join you in investing.
