Earn 6% on savings for the kids!

Don't miss these great ways to save for your child's financial future, and pay as little tax as possible.

We all know when it comes to saving one key rule always applies: the sooner you start the better.

It would seem that kids up and down the country are already wising up. Halifax recently reported that the average income for children with a part time job is almost £1,000 a year (£17.93 a week), with more than one third using their earnings to save up for something special.

It's great news that so many young people have already got into the savings habit. If you'd like to save on behalf of your children too, I'm going to show you how to make the most of your money.

First up, it's children's regular savers:   

Regular savers for kids

For those of you who want to put away a little money every month, by far and away the best choice is the Halifax Children's Regular Saver. With this account you can save between £10 and £100 a month and earn a fantastic fixed rate of 6% for a year. This is a very generous rate in the current climate.

Just bear in mind that the account must be funded every month with at least £10, and withdrawals aren't permitted during the fixed rate period. But that shouldn't be a problem if you want to build up a nest egg for your kids over the longer term.

• Watch this video on how to give your kids the best financial head start

After the year is up, your child's money will be transferred into your nominated account, or you can choose to move it into the easy access Halifax save4it Account where you child can learn to manage their own money. Having said that, the rate is currently just 1.05% so you'll probably be able to find a more generous return elsewhere when the time comes.

And don't forget to complete form R85 and send it to Halifax to register the account for tax-free interest.

If you have a lump sum to lock away for a while, Cheshire Building Society is offering a four-year fixed rate bond for children under 14. This account pays a fixed rate of 5% on deposits up to £10,000.

Pensions for kids

You can't fail to have noticed how badly the pensions crisis is affecting people who are retiring now. Tumbling stock markets have forced the value of pension schemes to drop off dramatically, while increasing life expectancy means a smaller pension pot has to stretch even further.

But you can give your kids a head start, and take advantage of tax breaks, by setting up a pension for them as soon as they arrive in the world. For pensions to work at their best they really need decades and decades in which to grow. If you start straightaway the pension could accumulate for 65 or even 70 years which should be plenty of time to achieve a decent pot by the time your kids retire.

You can save up to £3,600 gross each tax year in a stakeholder pension or SIPP - self-invested personal pension - for your kids. That means you only have to pay £2,880 out of your own pocket, and 20% tax relief will boost contributions up to the £3,600 cap, even if your child is not a taxpayer. So your child gets £720 of free money from the Government.

You can even save a healthy pension for your child without using up any money you have earned yourself. Read Give your child £151,000 for free to find how to turn your child benefit payments into £151,000.

Child Trust Funds

If you want to give your kids a financial boost when they reach 18, Child Trust Funds are a great way to achieve it. Every child born on or after 1 September 2002 is entitled to a £250 voucher free from the government, while children from lower income families are entitled to £500. The fund will be topped-up with another payment of the same amount when they're seven.

• Join our Save for your child's future goal

You can then save up to an extra £100 a month or £1,200 a year, and all returns from the fund are completely tax-free when they mature on your child's 18th birthday.

You can put the voucher and your own contributions into cash or a stocks & shares based fund. If you like the relative security of cash the current best buy is from Yorkshire Building Society with a tax-free rate of 3% including a 0.70% bonus for a year.

(If you happen to live near Hanley in Staffordshire a child trust fund from The Hanley Economic Building Society is paying 5% but it can only be opened at a branch.)

Children's savings and tax

It's important you understand how your children's savings will be taxed. Children, like everyone else, are entitled to a tax-free personal allowance. This is a set amount they can earn before tax becomes payable. This tax year the personal allowance is £6,475.

Assuming that the child doesn't earn an income during the tax year, and their savings account holds money gifted by friends or relatives other than their parents, then they can earn up to £6,475 in interest, tax-freee. Just remember to register their savings accounts for tax-free interest using form R85.

But it's a different story when you, as a parent save on behalf of your child. Children can only earn up to £100 a year in interest on money their parents give them. This amount will be tax-free. But if the interest earned exceeds £100, it will be taxed at the parents' highest rate. In other words, if you're a higher rate taxpayer, the interest on your child's savings accounts over £100 will be taxable at a rate of 40%. This is to stop parents from putting their own money in their children's savings account to avoid tax.

On the plus side, money saved for children by their grandparents or other relatives are not taxable even if the interest earned is more than £100.

Finally, if you have a question about how to prepare for your children's financial future, don't forget you can always ask for specific help from the lovemoney.com community using our excellent Q&A forum.

More: Top five things every parent should know | Your guide to child trust funds