Soo, interesting tax question

The step grandkid just did a TV ad. Bit of sitting in a car or summat I think. For which, at the age of 10, he gets £3k or so.

Presumably the dance teacher who booked him into it is going to try and take an agents’ fee.

But what’s the tax situation here? does he, at that age, have a tax free allowance?

Is he on his mothers’ (Dad’s out of the picture here)?

How does this work?

In terms of what to do with it, pay his dance lessons, put some aside for goodies or new dance shoes or whatever etc. And then whack some properly away. With this sort of sum, £1k or a bit above, probably premium bonds. Yes, there’s better investments but there will be all sorts of teenage fun when the occasional random check drops through the door.

Obviously, if he gets lots of work, then sorting investments out properly (no load Vanguard index funds sorta stuff, properly wrapped in an ISA and all that, it’s never too early to start a pension fund) but at this stage it’s just the tax thing we know absolutely nothing about.

So, who knows?

27 thoughts on “Soo, interesting tax question”

  1. Googling it, it seems the tax free allowance is the same as for adults. You might need to fill out an R85 on opening his bank account.

  2. One smart investment is to put it into a pension pot, for which he has a nearly 3k a year tax free allowance.

    Stakeholder pension.

    By the time he is 55 and can get it it will be worth oodles.

    And won’t impact any benefits and so on as and when.

  3. As above except Matt W’s £3k pension is for those with no earnings.
    If he is self-employed he can pay all his after-tax-&-NI earnings into a pension and get the tax, but not NI, added back (the limits are so high you don’t need to worry about them until he needs to hire an accountant).

  4. Yes, he has a tax allowance, regardless of age. The /income/ tax you pay is entirely and solely dependant on your, duh, /income/, not your age.

    If the 3k is his entire income in that year, he’s well below the 10k personal allowance, so it will be entirely tax free and low enough to not declare. Do another three spots and he’ll have to start declaring and paying income tax. And, following the logic of ‘at 16 you can pay tax, so you should have the vote’ loons, eligible to vote.

  5. Returns on Premium Bonds are dreadful these days.

    http://www.moneysavingexpert.com/savings/premium-bonds

    You’d do better to put the money in a good cash ISA and gamble with the difference in returns.

    (The ISA seems pointless at first glance for a kid with no other savings since he won’t be paying any tax, but it’s worth getting the money in there before he has anything else to invest, to shield future returns from the taxman. By the time he’s 18, it ought to have grown enough that it couldn’t then be paid into an ISA in one year.)

    That aside, I’d suggest that in the current low-return climate, it’s not worth saving/investing the money. Let the kid have fun spending it, within reason.

  6. Give him the money.
    Then let him piss it up the wall.
    Then don’t give him any pocket money.

    Cheaper learning than going to a private school, he’ll know the value of money.

  7. Forget pension funds – bung it into an ISA.. That way the money remains under your own full control and there’s no income tax liability when drawn down.

  8. Surely it’s all writeoffable against expenses? You need tuition, lessons and stuff to do acting things? Ultimately lodging costs, toys, breast milk, wining and dining of father figure (to end up well-adjusted enough, given the personal circumstances), and the like?

  9. @pogo

    “Forget pension funds – bung it into an ISA. That way the money remains under your own full control and there’s no income tax liability when drawn down.”

    As someone who uses ISAs extensively, I always have a niggling fear that ISAs could easily be abolished or substantially reformed, at pretty much any time.

    I sometimes see outrage that “rich people can have over a million pounds in an ISA tax-free” and so “something must be done”. Whether that’s abolishing ISAs, putting an upper limit on them, or simply giving everybody a tax-free allowance for unearned income (effectively making all savings and investments into a giant ISA-lite) before “merging” that with ISAs-proper (effectively the abolition of ISAs) … even pension rules are uncertain enough that a youngster has no idea what will be the status of their pension savings in five decades time, and ISAs are probably even more politically/legally uncertain in the long run.

  10. @MyBurningEars

    The direction of travel of recent changes to pensions suggest that ultimately they will be replaced by super-ISAs, so no restriction on withdrawing savings before retirement.

    For this to work then there has to be sufficient political will to ensure that those who blow their savings don’t get extra state support in retirement. I think that is very unlikely, so another disaster in the making.

  11. Yes, the brat gets a full personal allowance.

    The only restriction is that if the money ultimately comes from his parents (e.g. interest earned on money that they gave him) it may be taxed as their income rather than his. But that doesn’t seem to apply here.

  12. Dave said:
    “Returns on Premium Bonds are dreadful these days. You’d do better to put the money in a good cash ISA and gamble with the difference in returns.”

    Yes, I did the calculations on this for a magazine article a few years ago, and I suspect if anything it is even more so now.

    You put the money into a cash ISA and buy a lottery ticket for each £1,000 of capital – you get a better average return, you get a small guaranteed return, and you get a higher chance of winning a million.

  13. Is ISA the Brit equivalent of the Murikan IRA (investment fund, tax-free till you retire)? If not, what is it?

  14. @GlenDorran

    That does seem to be the trend at the moment. But it’s very difficult to speak for whoever’s in power in 15 years’ time. (So long as the trend is being driven by a sustained consumer appetite for greater flexibility, and politicians believe that people will be more likely to save for the future if they’re given that flexibility, I suspect it will continue. But when you’re planning for a teenager, then who knows?)

    @Richard

    That’s an interesting calculation. Any chance of a linky?

    @Sam Adams

    More like tax-free so long as ISAs or their successors exist.

    At various points in the past I’ve seen speculation about them being abolished, but it’s never come to pass. Nonetheless, they never came with a promise (either politically or commercially) that ISAs were for life.

  15. @MyBurningEars

    In America, a working individual places earnings into an IRA, and the earnings so invested are then tax free. The fund accumulates tax-free, and there are severe penalties for withdrawing the money prior to retirement. But after retirement, withdrawals are taxed like ordinary income.

    What are the provisions of an ISA?

  16. @Sam Adams

    ISAs have a maximum amount that can be invested each tax year. Investments can be made into cash, stocks and shares etc. All growth is tax free and there is complete flexibility on withdrawals.

    UK pension funds are more comparable to US IRAs than ISAs, although as has been said above, their future is unclear.

  17. Sam Adams, a UK ISA is (I think) sort of the opposite tax relief to a Yankee IRA.

    If I’ve got the IRA right, it’s like a UK approved pension scheme – you get tax relief when you invest (i.e. you invest out of pre-tax gross income), income & gains within the fund are tax-exempt, but then you’re taxed on the income when you finally draw it down.

    UK ISA is the other way round – you don’t get any tax relief when the money goes in (i.e. you invest out of after-tax net income), the income and gains within the fund are still tax-exempt, and there is no tax when you draw the money out.

    So an ISA is an on-going tax exemption rather than an up-front tax relief.

  18. Assuming the budding Antony du Beck is about 10 or 12 years old then a pension would seem inappropriate; he will have a good use for the money within the next decade. Assuming also thay he isn-t going to earn a great deal as a minor from his great gift – not paying more than 20% tax if that – then fiscal incentives to start a pension just wouldn’t seem to be there.
    As regards expenses, I think he would need to show a steady stream of paid professional engagements before that becomes a discussion worth having.

  19. I think every possibility has been covered up-thread already, but I would add—
    ISA’s do not appear to pay the highest rates of interest, perhaps the banks etc reckon that the benefit of tax relief will make up for a basically poor deal.
    So for someone whose income is less than the personal allowance and will not be in the near future there isn’t much to gain from an ISA.

  20. I’d put it in a pension, specifically a junior SIPP investing in stocks (not cash) but most importantly with very low charges. The kid gets the tax relief and the miracle of compound interest does the rest. Start him in the habit of putting 10% of his earnings away, it’s a good discipline. He’ll raise a glass to you from his villa in Tuscany when you’re long gone. My kids have had pensions since they were zero, and thus have a 20-25 year head start on most people. Just seems a no-brainer.

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