ISAs (Individual Savings Accounts) in the UK. What's the catch?

[moustachibana]

I've been reading about UK's ISAs. A tax-advantaged account type available in the UK.  From what I've read, one can add up to a certain amount of money in said account (£15240 in the 2016-17 fiscal year). Said amount of money can be used to purchase shares, which would be exempt of taxes.

i.e. If I were to move to the UK and get a job there, I could open an ISA account, then buy index fund shares until I reach FI. Then, I'd withdraw money from said account without any loss due to taxes.

The account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme either.

stocks and shares ISA - you don’t pay tax on any income or capital gains you’ve made on your investments

I have two questions.

• Did I understand ISAs correctly?
• If I understood correctly, why isn't every STEM degree holder in Europe and their mother emigrating to the UK?

https://www.gov.uk/individual-savings-accounts/overview
https://en.wikipedia.org/wiki/Individual_Savings_Account

Thanks in advance.

[mohawkbrah]

you're right on how it works. but i do believe you have to a be a UK citizen to qualify for it and not an immigrant. so an immigrant would first have to pass through citizenship

[Kwill]

I just asked about this at a bank this morning and was told that even though I'm a non-citizen resident, I could get an ISA as long as I have a UK National Insurance Number.

The catch for me as an American is that it would still be subject to US taxes. But then so would anything else, so it still might be a good deal. Do non-UK EU countries tax their citizens' income when they are working outside the country?

[frugledoc]

ISAs are awesome.  There is no catch.  They only really benefit those with high incomes and savings though as the uk also has an 11k capital gains allowance and 5k dividend allowance per person per year in taxable accounts

[shelivesthedream]

Agreed that there is no catch. But in the general climate of savings and income and taxes in the UK they are not totally earth-shattering. A great deal, sure, but not likely to be a deal breaker for those looking for FI.

[moustachibana]

Thanks for all the answers! They have been very clarifying. It seems I have a bit more of research to do!

[worms]

I have two questions.

• Did I understand ISAs correctly?
• If I understood correctly, why isn't every STEM degree holder in Europe and their mother emigrating to the UK?

...and despite all the hype about the shortage of STEM degree holders in UK, pay rates are not great compared to other countries. :(

[Doubleh]

All correct about isa's, there's no catch other than the limit on contribution, which is admittedly fairly generous. Think of it like a Roth ira but with no penalty on withdrawals ever.

The uk taxes anyone resident in the country, citizen or immigrant, on their worldwide income. Anyone not resident in the country is taxed by the uk only on any UK sourced income. So if I lived abroad but had earnings from a uk based property or company, I would pay uk tax on that income, buy not anything earned abroad. Most counties seem to use something along those lines - only the USA and I believe Eritrea tax citizens on their worldwide income regardless of residency.

US citizens should not bother with an isa - not only will you still be taxed by the irs who completely ignore the isa wrapper, but any funds even index trackers you put in there would come under the PFICS regime which means massive form filling and penal tax rates in the USA. The only things that would not be hit by this are individual stocks or cash.

As to SheLivesTheDream's comment I agree in general, but would still always max my isa allowance before investing outside of an isa. I'm old enough to have watched tax breaks come and go; the £5k dividend tax allowance was a gesture to make the introduction of tax on dividends for basic rate payers more palatable. As such I would be unsurprised to see it quietly dropped in a few years - or more likely just not increased in line with inflation until it becomes pointless.

But overall yes, I've said it before that, the uk tax regime right now may be one of the better in the world right now to be FIRE in. Of course downsides include the famous weather, the high cost of living especially in London and the south East (of course if you're fi you don't need to be there for jobs) and the constant whining about immigration.

[dreams_and_discoveries]

Yep - the only thing to add is ISA's can be changed by the government in the future. As they tend to benefit the upper middle class, you could easily see a more left wing government reducing this perk.

Comparing to other countries, I'd say tax rates aren't exactly low in the UK.....so in effect most people who use ISA's are saving the ~40% income/dividend tax on them.

And as to whether the UK's salaries vs tax rate vs cost of living makes it worthwhile immigrating, I'm sure that will depend on their respective values in your home country.

[Doubleh]

Isa's certainly could be changed by a future left leaning government but my gut feel is that at worst this may be a reduction in contributions or restriction who can contribute ie higer incomes might see their contribution limit tapered down. I think they are popular enough and used by even "ordinary people" that trying to get rid of the tax protection for existing savings would be extremely unpopular and so unlikely to happen. Also bear in mind those who would have the most to lose are the older crowd who have saved into an isa since it started, and a tessa before that. These are people who turn out to vote in disproportionate numbers so tend to be looked after.

[shelivesthedream]

As to SheLivesTheDream's comment I agree in general, but would still always max my isa allowance before investing outside of an isa. I'm old enough to have watched tax breaks come and go; the £5k dividend tax allowance was a gesture to make the introduction of tax on dividends for basic rate payers more palatable. As such I would be unsurprised to see it quietly dropped in a few years - or more likely just not increased in line with inflation until it becomes pointless.

...

But overall yes, I've said it before that, the uk tax regime right now may be one of the better in the world right now to be FIRE in. Of course downsides include the famous weather

A future government would have to be pretty brave to reduce ISA limits but it would be easy to just not increase them and to allow inflation to take its course. I too regard maxing out my ISA as a savings priority but I regard it as compensation for the higher taxes and lower wages in the UK compared to the US (and the NHS!), so in my mind it all evens out in the end. If they ever did do away with ISAs it would add a few years to FI plans but not decades.

And I love the weather! It's rarely devastatingly cold or devastatingly hot, almost always a reasonable temperature to be outside in without any extreme survival-type clothing required. And it always changes so you never get bored, and even if you hate today's weather it'll be different tomorrow! It's supposed to get up to 24 degrees here today with blazing sunshine, which I find too hot, but as we only get this kind of weather for a few weeks a year I can tolerate it. Likewise with freezing, snowy weather in winter. If I had to live in this for weeks or months on end I'd really struggle!

[Kwill]

US citizens should not bother with an isa - not only will you still be taxed by the irs who completely ignore the isa wrapper, but any funds even index trackers you put in there would come under the PFICS regime which means massive form filling and penal tax rates in the USA. The only things that would not be hit by this are individual stocks or cash.

I've been reading about this and trying to understand my options. I made an appointment to go back to the bank and ask about savings accounts and ISAs next weekend because they started me off with just a current account that doesn't get any interest.

As a US citizen in the UK, it sounds like I basically need to send money back to the US if I want to save or invest it such that it can grow and then send money back to myself in the UK if I want to ever use it. That means paying fees every time, and it seems overly complicated, especially if I ever hope to buy a house / flat or something like that. This is still new to me -- am I misunderstanding or missing an obvious option?

[shelivesthedream]

Actually, speaking of ISAs and catches, I'm waiting to hear about the catch for the recently-announced LISA. Literal free money!

[dreams_and_discoveries]

Actually, speaking of ISAs and catches, I'm waiting to hear about the catch for the recently-announced LISA. Literal free money!

I think having to wait 20+ years until you are 60 is a big catch - pensions work out better value for most people, especially higher rate tax payers.

[Doubleh]

Actually, speaking of ISAs and catches, I'm waiting to hear about the catch for the recently-announced LISA. Literal free money!

I think having to wait 20+ years until you are 60 is a big catch - pensions work out better value for most people, especially higher rate tax payers.

Yep that's the disadvantage of it. If you're a basic rate tax payer then the 25% government top up and possible extra flexibility - ie you can use it to buy a house, and maybe some other life events but we don't know about yet - compares pretty well against a pension with 20% tax relief and no option to spend it before 55. If you're in this position it's a pretty good deal.

Don't forget if you're a higher rate taxpayer the tax relief at 40% on pension contributions of up to 40k are far more valuable than the isa top up, which is limited to 25% on a 4k contribution.

Long term there was much speculation at the recent budget of the government scrapping  tax relief on pension contributions. They bottled it, but the lifetime isa is a pretty good idea of what this would have looked like, and if it succeeds it may well end up replacing deductions for pension contributions.

[shelivesthedream]

Actually, speaking of ISAs and catches, I'm waiting to hear about the catch for the recently-announced LISA. Literal free money!

I think having to wait 20+ years until you are 60 is a big catch - pensions work out better value for most people, especially higher rate tax payers.

Yep that's the disadvantage of it. If you're a basic rate tax payer then the 25% government top up and possible extra flexibility - ie you can use it to buy a house, and maybe some other life events but we don't know about yet - compares pretty well against a pension with 20% tax relief and no option to spend it before 55. If you're in this position it's a pretty good deal.

Don't forget if you're a higher rate taxpayer the tax relief at 40% on pension contributions of up to 40k are far more valuable than the isa top up, which is limited to 25% on a 4k contribution.

Long term there was much speculation at the recent budget of the government scrapping  tax relief on pension contributions. They bottled it, but the lifetime isa is a pretty good idea of what this would have looked like, and if it succeeds it may well end up replacing deductions for pension contributions.

Agreed that it's not such a good deal for older people (when you've probably bought a house and are earning more) but for people in their twenties it seems amazing.

[cerat0n1a]

If I understood correctly, why isn't every STEM degree holder in Europe and their mother emigrating to the UK?

Where I work (almost 100% of staff STEM degree holders) about 600 employees out of 1500 are from other EU countries (and plenty more from outside the EU). Another similar company I know has about 80 from 100 from other EU countries.

If you look at unemployment rates in France, Spain, Italy etc. (45% youth unemployment in Spain which cannot be good for long-term stability of society), it's pretty obvious why people would come to Britain where there is essentially work for anyone who wants it in many parts of the country. I doubt anyone has ever come here for an ISA.

As frugledoc has pointed out, the ISA only helps once you have reasonably significant investments. You can earn £1000 in interest, £5000 in dividends and £11 000 in salary without paying tax on any of them, plus £11 100 capital gains tax free. You need about £100k invested in shares before you'd pay tax anyway.