Baby finance 101

I became a parent recently and was interested to learn how I can save money for my child's future. Whilst there are plenty of online resources that go deep on individual topics, I could not find any that touched on everything. I hope this article serves as a checklist of financial to-dos for your baby. In this article, focused on the UK, I will cover both immediate things to pay attention to, such as childcare costs and government support for parents, but also longer-term goals, such as passing money to your child. I will not go into exhaustive detail, but will provide links to resources that you can use to dive deep.

Table of contents

• Motivation
• Pre-requisites
• Early childcare expenses
  • Parental leave might include loss of pay
  • Nursery can cost around £1000 a month or more
• The government offers some financial support for parents
  • Child benefit - Up to £1355 per year from the government
  • Free childcare for working parents - Free "30 hours" a week
  • Tax-free childcare - Up to £2,000 per year from the government
• Protect children's financial future
  • Insurance is a way to protect against unlikely, but potentially devastating events
  • Will
• There are several ways to pass wealth to your child
  • NS&I premium bonds - Max £50,000 savings account with lottery
  • Junior SIPP - £3,600 per year contribution to child's pension
  • Junior ISA [JISA] - £9,000 per year tax-free savings
  • Retain control using your ISA/pension & give gifts when you want to
  • Any wealth transfer when you die may be subject to inheritance tax
  • Comparison table
• Conclusion

Motivation

Children are a joy, but they are also a huge financial commitment. In 2024, the cost of raising a child to age 18 was a staggering £260,000 for a couple [CPAG]. Especially in the beginning, any unpaid parental leave and childcare costs cause sudden shifts in cash flow for new parents. Making use of available government support can help a lot, and we will cover some of the options in this article.

It is important to be financially responsible and plan for your own retirement so as to reduce the likelihood of depending on your children for financial support in your old age. If you are privileged and have money to spare, then support from the bank of mum and dad with education and a housing deposit can alleviate the financial stress of entering adulthood. We will cover options to invest in your children's future and touch on inheritance tax as well.

Pre-requisites

I will not cover essential financial skills every adult should know, such as budgeting, saving, investing, or retirement planning. Hopefully, you're already familiar with these topics. If not, I recommend starting with r/UKPersonalFinance's flowchart. You can build on this further with Meaningful Money: Season 18 - Ultimate Guides, also available as a podcast.

Early childcare expenses

Parental leave might include loss of pay

The first big expense is the loss of pay when you take parental leave. Sadly, the UK lags most of its European counterparts when it comes to parental leave. Statutory maternity leave can only be up to one year long, of which only nine months are partially paid and atrociously capped at £187.18 per week (less than minimum wage) for the most part [gov.uk - Maternity pay and leave].

The UK is also embarrassingly patriarchal, with only two weeks of leave for fathers [gov.uk - Paternity pay and leave]. There is an option for parents to share their leave via Shared Parental Leave and Pay but it is a bit complex to arrange.

Some companies may allow you to take additional unpaid leave or change your contract to part-time. Some parents may take a career break to look after the child. Whatever your circumstances are, you need to plan your parental leave's impact on your cash flow and adjust your savings and budget accordingly.

Nursery can cost around £1000 a month or more

Nursery costs vary by location. So, check with the nurseries local to you how much each of them costs.

The government offers some financial support for parents

Fortunately, the government offers some support for parents depending on various eligibility criteria. In particular, each parent's adjusted net income is a factor.

Child benefit - Up to £1355 per year from the government

You can get child benefit up to £26.05 per week, or £1355 per year, for a first child [gov.uk - Child benefit]. To be eligible, both parents must have adjusted net incomes of less than £80,000 each. The benefit is reduced on a taper from £60,000 to £80,000. You can continue to use the benefit at least until they are sixteen.

You can claim child benefit 48 hours after you’ve registered the birth of your child.

Free childcare for working parents - Free "30 hours" a week

You get 30 hours of free childcare if your child is aged 9 months to 4 years old [gov.uk - Free childcare for working parents]. However, the benefit title is misleading as it applies to only 38 weeks of the year. In practice, nurseries spread out this benefit over the full year, so it ends up being a discount, albeit a significant one, on the childcare cost rather than a free service. Each nursery will publish what their fees are with and without the benefit.

To be eligible, both parents must have adjusted net incomes of less than £100,000.

Tax-free childcare - Up to £2,000 per year from the government

You can get up to £500 every 3 months, or £2,000 a year, for each of your children to help with the costs of childcare [gov.uk - Get tax-free childcare].

To be eligible, both parents must have adjusted net incomes of less than £100,000.

Protect children's financial future

We can only hope that we get to be there for our children well into their adult lives. On the off chance that a parent is unable to work and earn a living or dies, we can protect our children's financial future.

Insurance is a way to protect against unlikely, but potentially devastating events

The three key insurances worth looking into are:

1. Life insurance: Provides a lump sum payment to your beneficiaries in the event of your death.
2. Critical illness insurance: Pays out a lump sum if you are diagnosed with a critical illness like cancer. It provides a buffer allowing you to focus on your health.
3. Income protection: Provides an income if you are unable to work due to illness or injury.

Will

A will is a legal document that outlines how you want your assets to be distributed after your death, and who should look after any children. It is important to have a will to ensure that your wishes are carried out and to avoid any potential disputes among your family members.

Start by looking at MoneySavingExpert's guide on cheap and free wills.

Note that pensions and life insurance policies require you to nominate the beneficiary in case you die. They are not covered by a will. So, make sure you keep your beneficiaries up to date.

There are several ways to pass wealth to your child

There is a range of options for passing wealth to your child, which we will explore in this section.

Choosing between them can be difficult, and it is probably worthwhile using a combination of them to suit your needs. I find it useful to look at it as a trade-off between control and tax efficiency [James Shack - How to Invest for Your Children & Grandchildren (without them becoming brats!) ]. I favour retaining control over my wealth for longer because I cannot predict how financially responsible my children will be at the age of 18.

NS&I premium bonds - Max £50,000 savings account with lottery

NS&I premium bonds, issued by the UK government, are a type of savings account that offers a chance to win cash prizes each month. An individual can own up to £50,000 worth of premium bonds.

Pros

• Family and friends can easily buy premium bonds for a child.
• Prizes are tax-free.

Cons

• Premium bonds are cash-like and therefore offer low returns with average luck.
• The bonds and any prizes belong to the child, even though it is managed by the parents until they are 16.

Junior SIPP - £3,600 per year contribution to child's pension

A Junior Self-Invested Personal Pension [SIPP] is a pension for children [HL - What is a Junior SIPP?]. Contributions are limited to £3,600 a year, including any tax relief added by the government.

Pros

• The government adds 20% (regardless of your income tax band) as tax relief for each contribution.
• The child can't withdraw the money until their retirement; therefore, there is less risk, arguably, that they will squander it.

Cons

• Locked away until pension age. Therefore, it cannot be used in the early years when the money is more useful, especially for education and a first home.

To select a Junior SIPP provider, you could start by looking at Money to the Masses - Best and cheapest Junior SIPPs.

Junior ISA [JISA] - £9,000 per year tax-free savings

Junior Individual Savings Accounts (ISAs) are long-term, tax-free savings accounts for children that let you save up to £9,000 per year. Similar to adult ISAs, there are two types: Stocks & Shares Junior ISA and cash Junior ISA. Cash Junior ISAs are less appealing for long-term growth, given that cash is not an investment and is likely to yield low returns over an 18-year horizon.

Pros

• Tax-free growth and withdrawals.

Cons

• The ISA belongs to the child and the child can withdraw from it once they turn 18.

To select a Junior ISA provider, you could start by looking at Money to the Masses - Best Junior stocks and shares ISA. I use Interactive Investor [II] as I already maintain my own ISA with them. If you opt to use it, please use my referral link for Interactive Investor to sign up.

Retain control using your ISA/pension & give gifts when you want to

You could just invest in your own ISA and pension and give gifts to your child when you want to.

As of the 2025-2026 tax year, an adult can defer tax on up to £60,000 invested annually in the workplace pension. You can also protect up to £20,000 per year of investments from capital gains or dividend income tax in the Individual Savings Account [ISA]. These are fairly generous allowances.

You cannot give all your wealth away while you are alive, as you need to fund your own hard-earned retirement. On the other hand, if you have money to spare, there isn't much point waiting until your death when your child might be close to fifty and have less need for financial support. Significant costs during early adulthood, such as university, buying a home and rent/mortgage, are the ones where parental support could make a huge difference to quality of life.

There are some allowances to give tax-free gifts [gov.uk - Rules on giving gifts]. In particular, no tax is due on any gifts you give if you live for 7 years after giving them. Regular payments from your monthly income are also tax-free.

Pros

• You retain control over your wealth and can choose when or how much to pass to your child.

Cons

• In the case of the pension, you will not be able to pass any of it to your child until your own retirement age.

Any wealth transfer when you die may be subject to inheritance tax

It is worth being aware of inheritance tax [IHT], whether it might impact you and then do some IHT planning if necessary.

Only a spouse can inherit your estate tax-free. For children, there is no inheritance tax up to a £325,000 threshold [gov.uk - How inheritance tax works]. The tax-free threshold increases to £500,000 if your estate includes a home and your estate is less than £2 million [gov.uk - Passing on a home]. A married couple leaving their home to their children could pass on up to £1 million tax-free. The IHT rate of 40% is charged on the part of your estate that is above the tax-free threshold.

In the tax year 2022 to 2023, only 4.62% of UK deaths resulted in an IHT charge [gov.uk - Inheritance tax liabilities statistics]. Most people will not need to worry about it. However, for those living in high-cost-of-living areas such as London, where the average house price is as high as £564,000 [gov.uk - UK house price index for January 2025 ], IHT liability is more likely.

Note that, as of 2027, any unused pension may also be subject to IHT [gov.uk - Inheritance tax on unused pension funds and death benefits].

Comparison table

Here’s a quick summary comparing the main options side-by-side.

Conclusion

Raising a child in the UK can feel financially overwhelming at first, especially with the sharp rise in childcare costs and limited parental leave. Do take the time to understand what support is available, such as child benefit, tax-free childcare, and free nursery hours.

Prioritise protecting your family with insurance, and have a will that clearly outlines your wishes and guardianship plans.

Looking further ahead, building your child’s financial future is about finding the right balance between tax efficiency and control. Options like Junior ISAs, Junior SIPPs, and premium bonds all play different roles, while continuing to invest through your own ISA or pension keeps flexibility in your hands. Even if you choose to start small, consistent saving and informed choices today can grow into lasting security for both you and your child.

I hope this article was useful as a starting point. Please do let me know if I have missed anything out. Feel free to also share your own preferences and opinions. I would love to hear and learn from different perspectives.

I wish you all the best in your parenting journey!