‘What if Christmas, he thought, doesn’t come from a store. What if Christmas, perhaps, means a little bit more” – Dr Seuss’ The Grinch.
If you’re tired of buying plastic toys that are forgotten by January, this could be the year to give a gift that lasts. We’re not saying ditch the flashy, fun-to-open gifts all together, but you might want to sprinkle in a little money among them. This doesn’t mean a wad of cash in a card, but money (even a small amount) that will grow alongside your child.
With inflation pressures still lingering, energy bills high and household budgets under strain, a financial gift this Christmas can help equip younger family members for the future.
But before you dip into your pocket, the tax efficiency of a money gift requires some thought. Here are five tax-friendly financial gift options this Christmas.
1. Open a savings account – but act while good rates still exist
A simple, accessible place to start is a children’s savings account in the child’s name. It helps them learn the value of saving, earning interest, and making money work.
As of late 2025, many children’s savings accounts are offering decent interest rates. For example, Nationwide lists five per cent AER on a children’s instant-access account. But with the Bank of England base rate now firmly on a downward path, these stronger deals may not last – so acting sooner rather than later makes sense.
Top tax tip: If you deposit money you’ve given your child, and the interest from that gift exceeds £100 in a tax year, then you (the parent) may be liable to pay tax on that interest if it takes you beyond your Personal Savings Allowance. The £100 rule doesn’t apply if the gift came from grandparents or other relatives.
See our top ethical savings account providers
2. Use a Junior ISA (JISA) for long-term growth
For more long-term goals – university, gap year, first car or home deposit – a JISA is a great tax-efficient wrapper. The contributions, growth and income are free of income tax and capital gains tax.
The JISA annual allowance remains £9,000. When your child reaches age 18, the account converts into a regular ISA and they can access the funds or continue investing.
Top tax tip: If you contribute the full £9,000 annually, even modest returns compound significantly. For example, over 18 years, even at five per cent per year, a full-allowance steady contribution can build a very sizable fund. (Of course actual returns fluctuate.)
See our top ethical JISAs
3. Set up a pension for your child now
This might feel like a gift for way down the road, but opening a pension pot for a child gives them a tremendous head-start for later life.
Even though children don’t (typically) have taxable earnings, you – or a relative – can contribute to a pension on their behalf: for example, you could invest £2,880 into a SIPP (Self-Invested Personal Pension) for them, and with tax-relief topping it up to £3,600 gross for the year (i.e., £720 of tax relief). The money then grows over decades.
Such a gift is less “open now” and more “opens decades later” – but that’s the point. If the fund grows at, say, five per cent year on year, starting very young dramatically multiplies the effect.
Top tax tip: If you can afford to maximise both JISA and a pension contribution, you could supercharge the child’s future nest egg. But ensure you’re comfortable with the long-term lock-in of pension funds and the risk/return profile.
See our top ethical pension funds
4. Cash gifts: simple but useful for inheritance tax and flexibility
Gifting cash remains one of the most flexible options: it can help reduce your future inheritance tax bill, support young family members and be structured in tax-efficient ways.
For example, you can place children’s savings into tax-efficient wrappers such as ISAs or JISAs rather than leaving them in cash where interest may attract tax. And if you’re making larger gifts, be mindful of inheritance tax (IHT) rules: gifts made more than seven years before death may fall outside your estate for IHT, and smaller allowances – such as the annual £3,000 gift allowance and the £250 small-gift allowance – still apply.
Top tax tip: Use the annual gift allowance (£3,000 per year per giver) to gift tax-free. You could also use the “surplus income” rule (gifting from your regular income after covering your usual living costs) if it’s appropriate. Just make sure you’re using money you don’t need for your own ongoing expenses.
The Good Guide to what to do with an inheritance
5. For adult children: consider a Lifetime ISA (LISA)
If your child is turning 18 (or is already an adult) then a LISA can be a compelling option to support their first-home purchase or retirement. You can put in up to £4,000 per year, and the government adds a 25 per cent bonus (so up to £1,000 per year) until the saver turns 50. The funds must be used for buying a first home (value capped at £450,000) or held until age 60, otherwise a withdrawal penalty applies.
Top tax tip: If they already have a JISA that’s matured (at age 18) or can redirect future JISA contributions into a LISA, you could use the full allowance and bonus to give them a great start on the housing ladder.
See our top ethical Lifetime ISAs (LISAs)
