Four great reasons to invest in a Junior ISA by 5 April

ISA season is getting into full swing as we rush to make the most of our £20,000 allowance before the end of the tax year on 5 April. With the capital gains tax (CGT) allowance cut to just £3,000 a year, there’s never been more urgency to keep our nest eggs out of the reach of HMRC.

But in the race to use our own ISAs, it’s important not to overlook another ISA allowance that will run out in April.

• Invest with ii: Transferring a Junior ISA | Open a Junior ISA | ii Friends & Family

Every year children get a £9,000 tax-free savings allowance, called the Junior ISA (JISA), and like adults they have a choice of cash and stocks and shares ISAs. But unlike their parents, they’ve not got instant access to their money and will need to wait until their 18th birthday before they will be able to get their hands on it.

In the 2022-23 tax year, parents, grandparents and other relatives paid £1.5 billion into JISAs on behalf of the youngest members of their family – with an average subscription of £1,220 over the year.

Paying into a JISA on behalf of a child can be a great way of helping them deal with some of the biggest expenses they will face as a young adult, but there can be less obvious benefits too, for children and adults alike.

With that in mind here are four reasons to top up a JISA over the next few weeks.

1) Help set them up for adult life

Over the years, even modest contributions to a JISA could make a big difference to the eventual size of their pot. And compounding returns mean the earlier you can do it, the better.

A one-off contribution of £1,000 to a stocks and shares JISA could boost their nest egg by £1,276 over five years, £1,629 over 10 or £2,407 for babies with the full 18-year investment horizon ahead of them (assuming an average 5% annual return before charges).

If they haven’t had any money paid into their JISA this tax year, and you are able to pay in the full £9,000 allowance, it could add £11,487 over five years, £14,660 over 10 years or £21,660 over 18.

Even better, an – incredibly generous – contribution of £9,000 a year for 18 years, could see them starting adult life with £274,851 under their belt. In today’s money, that’s enough to buy the average UK house mortgage-free, with enough spare change for a sofa and a wide-screen TV. Roll on 18 years and it might not stretch quite that far due to the impact of rising property prices, but it will still give them an impressive leg-up.

2) Cut your own CGT bill

The tax benefits of paying into a JISA aren’t just limited to children. There could be benefits for parents and grandparents too.

Recent cuts to the CGT allowance mean more investors will be starting to pay CGT on their investments. And the amount of tax they will need to pay has risen too, following increases to CGT rates in last year’s Autumn Budget.

Gradually moving funds out of general investment accounts (GIA) and into ISAs and pensions– using a Bed & ISA, for example – can be a great way of sheltering wealth from tax.

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However, if you have used up your allowances for the year, or you’re simply happy to share your wealth, you could consider transferring money into your child or grandchild’s JISA instead, using the same process. So long as the amount you are saving doesn’t cause you to breach your annual CGT allowance, there will be no tax to pay and it will be sheltered from tax in the future.

3) Reduce your IHT liability

If it’s looking like your loved ones will need to pay inheritance tax (IHT) on your estate when you die, paying into a JISA for your grandchildren could also be a helpful way of reducing their bill.

Lump sum gifts are typically considered as ‘potentially exempt transfers’ and you will need to survive seven years for them to leave your estate completely and be free of IHT altogether.

However, everyone has an IHT-free gifting allowance of £3,000 each year – which could be paid into one JISA or spread across multiple accounts, depending on the number of grandchildren you have.

It’s also possible to carry over your gifting allowance for one tax year, so if you didn’t use it last year, you could give away up to £6,000 tax free before 5 April. Couples could, potentially, be able to give away as much as £12,000 between them.

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Alternatively, if you have spare income, you may also be able to make use of a lesser-known exemption. Regular gifts from surplus income rules let you give away as much as you like IHT free, so long as you can demonstrate that the gifts are regular, come from income rather than capital and don’t have an impact on your standard of living.

Using this allowance to make regular payments into a JISA can be a useful way of passing money on to younger generations – especially if you want that money to be saved for their future and not spent immediately.

According to a freedom of information request from The Telegraph, in 2022, only 430 families took advantage of the exemption.

This will partly be down to the fact that you need to keep scrupulous records of your gifts, your income and your expenditure. However, over the years it can be an effective way of getting significant sums out of your estate, making it well worth the effort.

4) Teach children about saving and investing

You don’t have to be paying huge sums into a JISA to make a difference to a child’s financial future. 

Any contribution you can make – whether it’s £25 or £1,000 – can give you the nudge you need to start talking to your child about savings and investing, prompting conversations about interest, the power of compounding and the benefits of saving for the future.

If you’ve got a teenager, you might want to start talking to them about shares and how the stock market works.

Letting them choose a company they would like to follow and giving them some money to buy some shares within their ISA, for example, can be a great way to get them started on their own investment journey.

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The more they engage now, the more likely they will be to carry on saving and investing when their JISA rolls into an adult ISA at age 18.

Is it risky paying too much money into a JISA?

A JISA can be a fantastic tax-planning tool for children and the people who pay into it on their behalf.

However, the worry that many parents, grandparents, uncles or aunts will have is that children will have full access to the money as soon as they turn 18, which might put them off contributing larger sums.

This is a valid concern. You might be hoping they’ll use the money to support themselves at university or to buy their first car or home, but without any restrictions on the cash, it’s totally up to them what they do with it.

It’s impossible to force your kids or grandchildren to spend the money in the way that you wish. However, if you’re taking the opportunity to talk to them throughout their investment journey and discuss why you are contributing to their pot, they are more likely to use it responsibly, when the time eventually comes.