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How to teach your kids about: Tax

I know it might seem like a strange and boring topic to talk to kids about but my kids seemed enjoy learning about it. Also, tax is such a big part of our financial lives as we grow up (noting that at least a quarter of all the money you receive will go to the ‘Taxman’ in one form or another). So in this blog I go through how I talked to my girls about tax using ‘the Money Birds’ (more on them later). For the avoidance of doubt, I’m not teaching my 5 and 8 year olds the definitions of different taxes that they could pay such as VAT and CGT. Instead, i’m focusing on the broad subject of tax, why it exists and, making them aware that they are legally allowed to save without paying tax (to a limit). Isn’t talking about tax to young kids a bit premature? Like other topics, such as credit cards and pensions, there are a number reasons to talk to kids about tax. The most important is that I want them to form an objective opinion on the topic. Most people will form their opinion based on their first experience and therefore this risks potential negative feeling. Especially when it comes to tax, as most people’s experience is seeing tax taken from their first pay cheque. I want kids to grow up with a positive view of money and how they can use money to make their lives, and the lives of others, better. The second reason to talk to them about financial topics early on is that they are unlikely to receive these lessons at other times, as currently most schools don’t teach these important lessons. Explaining tax : Give them the good news first As alluded to above, most people see tax as a negative as it takes money away from you which prevents spending or saving. Whilst this is true, when teaching kids about tax we should look to focus on the positives of tax first so they appreciate the need for tax and can therefore form a balanced view. This is especially true if, like my daughters, your kids only reference to tax is the evil Sheriff from the classic Disney film ‘Robin Hood’. There, the Sheriff comes around and takes tax off everyone or puts them in prison.

The good news first approach: “Governments around the world want to ensure that people are looked after. This means providing money to schools, hospitals, the police and the fire stations as examples. Without this ‘tax money’ we wouldn’t have these services. Also, when people are in need of money, as they can’t earn money themselves, the government will give them some money to live their lives. Without this support, many people would struggle to buy food or find somewhere to live. In order to pay for services, and to provide support to the people the government look after, they need money. Therefore, the government takes some money from those who can afford to pay it. The money taken is called TAX.” How does the government take money from people? This will clearly vary by country and can come in lots of different forms. It’s good to give your kids a bit of a sense of where tax will be taken from. For example:

  • Every time you earn money (income tax and National Insurance (UK))

  • When you buys things (sales tax, VAT and a higher tax on things the government doesn’t want people to buy which are bad for people)

  • When you save money (interest rates and capital gains tax)

  • Buying a house (stamp duty)

  • Living in a house (council tax)

  • Driving on the roads (road tax)

Again, whilst it might seem like the government is taking tax from many different places, which seems like a big negative, it’s important to highlight that they do this intentionally to spread out the tax burden. If tax was just taken from one place, they would need to make that a really big, single amount. The example I used with my girls: If I gave you £10 but said you had to pay tax, would you rather: a) I took £6 on the day I gave it to you or b) I took £3 on the day I gave it to you, then £1 each time you decided to spend some? They both decided on b) as it seemed like a smaller amount and they felt like they could be better off if they decided not to spend the full £10. This is why the government spreads out tax money coming in, across different places, i.e. to avoid taking very large amounts (especially given some people are already paying 50% income tax at the moment). The latter piece is also very important. The government wants people to save some money which I discuss below. Tax and saving - the Money Birds! As mentioned, tax money is used to help people. Whilst the government wants to help people, they also want to make sure people have money to look after themselves. If people didn’t save for themselves then the government would need to give money to everyone when they aren’t working and this would be very expensive. This is why governments provide ways to allow people to save without paying tax, i.e. as an incentive to save. As per usual, I used seeds and trees to help my girls visualise this topic. For those that haven’t read my blogs before, we invest our girls savings and show them these savings as Blue Trees. As their savings grow, their Blue Tree forest grows. In the context of tax, we want to make sure that we plant those Blue Trees in places without ‘The Money Birds’. The Money Birds take fruit and seeds from the Blue Trees which reduces how much they can grow in the future. The Money Bird’s aren’t bad though. Think of Money Bird’s like bees. We like that bees make delicious honey but we’d rather not eat in a place where there were lots of bees. Therefore, whilst knowing that the Money Bird’s are good, we want to put our Blue Trees somewhere without them. The government therefore gives everyone the ability to plant their Blue Trees in a place which doesn’t have any Money Birds. Although, you are only allowed to plant a certain number of seeds each year in these places. Sadly, lots of people plant their Blue Trees in places where the Money Bird’s can take their fruit and seeds without knowing that they can in fact grow them in these special places. After I said this to my daughters I had a bit of a proud moment when my eldest, 8, said - “like the Hidden Forest”. This is a reference to pensions which I’ve spoken to them about previously (see full blog on pensions and the Hidden Forest here. Using pocket money to teach your kids about tax As I’ve mentioned in my previous blogs, pocket money is one of the most underrated financial education tools out there. Whilst doing research for this blog, I found one suggestion which was to apply a tax to your kid’s pocket money to avoid the surprise of tax when they are older. This ‘tax’ would be put away and then used by the ‘family’ as a collective pot of money at some point in the future, i.e. not just taken away. I don’t currently do this with my girls but I’m thinking I might try it when we next increase the amount of pocket money we give them. Summary Look to talk to your kids about tax early on so you can give them a balanced view of tax. If their first experience is when they get their first pay cheque then they could have a negative view which can lead to bad feelings towards money in general. You want your kids to grow up with a positive mindset concerning money. If they grow up knowing where they can plant their seeds so they can grow their trees to their full potential, then they are in a much better educated place than many other people today. Thanks for reading (for more blogs, make sure you subscribe here) Will


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