Children have their own annual personal allowance (£9,440 in 2013-14 and £10,000 in 2014-15), so they can earn interest up to this level without paying any income tax.
Grandparents can open accounts in grandchildren’s names and provided they fill in form R85 no tax will be deducted from their interest. For longer-term savings, the Sunday Telegraph discusses Jisas (Junior ISAs) and stakeholder pensions. The Jisa has to be set up by a parent but grandparents can then top them up to a maximum of £3,720 a year per child (£3840 for 2014-15). The child effectively gets access to the JISA at age 18 when the JISA automatically converts to a full ISA. If that seems too soon for them to have the money, contributions of up to £2,880 a year into a stakeholder pension (which can be opened for infants and children) will give a big boost to their retirement savings pots. Another alternative might be to set up a discretionary trust that invests the regular savings into collective investments. Complete or substantial tax freedom will be secured but the grandparents or parents of the child can control who gets the funds and when . This valuable control may be seen as appealing by many . Advice will be needed on setting up and running the trust .