Now we’re getting to the accounts that aren’t part of the flowchart for a “typical” American in the UK planning for retirement, but they have their purposes and might be useful in your individual plan.
Synopsis
A Cash ISA is a glorified savings account that’s UK tax free, US taxable. Most people don’t pay UK tax on savings anyway, but if you exceed the Personal Savings Allowance, it might be useful for short term savings.
Priority
Not a priority for long term investments due to the low interest rates (about the same as a typical savings account, or often slightly worse). It could be good for a shorter term saving goal, like buying a house, a car, maybe saving for education, etc.
Eligibility
All UK residents age 16+
Investment Options
Cash only.
Risk & Return
Effectively risk free, with FSCS guaranteeing up to £85k in case the bank fails. If you’ve got more than £85k, you can have accounts at multiple banks, although you can only contribute to one Cash ISA per year (you could contribute to one in 2020, and then another in 2021, that’s fine).
Interest rates will vary with the interest rate environment, but typically similar or slightly worse than a non-ISA savings account.
Withdrawal Options
You can withdraw your contributions and interest at anytime, unless you select a “fix” account. This is basically the UK equivalent of a CD, where the interest rate is locked for the term of the “fix”, but there are penalties for accessing it early. Fix’s usually have slightly higher interest rates than “easy access”, to compensate for the money being locked away.
Contribution Limit
£20k per year per person – this is pooled among all ISAs. So if you contribute £4k to a Lifetime ISA and £10k to a Stocks & Shares ISA, you only have £6k left in the limit.
Unless your specific account is “flexible”, withdrawals in a year don’t reduce the amount towards the cap. For example, if you deposit £10k then withdraw £5k, you can only deposit £10k for the rest of the year, not £15k.
Fees
Typically none, except maybe an early withdrawal penalty for a fix.
UK Tax Treatment – Contributions
Contributions are from after-tax money, no tax impact.
UK Tax Treatment – Withdrawals
No UK tax on the interest, which is the advantage over a savings account. However, UK taxpayers have a Personal Savings Allowance of £1,000 if you’re a 20% basic rate taxpayer, £500 if you’re a 40% higher rate taxpayer, £0 if you’re a 45% additional rate taxpayer. As long as your total interest is below the PSA, you don’t pay tax anyway.
Therefore, unless your interest is above the PSA, there’s no reason to go for a cash ISA over a cash savings account. Note that the PSA also applies to foreign interest, like from any US savings accounts or CDs.
US Tax Treatment – Contributions
Contributions are from after-tax money, no tax impact.
US Tax Treatment – Interest
Interest is fully taxable in the US, like any savings account. The US doesn’t have an equivalent to the PSA. If you happen to have other passive category taxes* paid to the UK, you could use those to offset these US taxes.
*Not sure what passive category taxes are? US Foreign Tax Credits are split into different categories, passive category taxes cover taxes on things like interest, dividends, and capital gains. You can only offset taxes within a category – the UK taxes on your salary won’t help you here. I’m planning a longer post exploring the Foreign Tax Credit.
FIRE Across the Pond 
Looking forward to a post about the US Foreign Tax Credit… That get’s very complicated very quickly once you start to have multiple sources of income and gain in both countries. There seems to be three or four different forms & publications that cover FTCs and multiple ways of calculating potential tax due, plus potential AMT complications, use of the scary “income resourced by treaty” options, etc. I’m aiming to simplify some aspects of my investment accounts to minimise the complexity of the FTC filings and hopefully avoid possible errors. I’m still waiting for the IRS to approve my dad’s e-filed 2020 return (another topic!) based on complex FTCs and I’m sure the IRS are looking at it very carefully…
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I’m looking forward to doing the research, in a masochistic kind of way. I feel like I understand them well enough to file my own taxes (after a fair amount of study, going through TurboTax printouts line by line and bouncing them off IRS instructions), but they absolutely get complicated quick. Definitely won’t be the authoritative guide to FTCs, but hoping I can explain the most common ways they can help people in our situation.
I’m about to amend my 2019 returns to carry back a passive category foreign tax credit once I finish filing my 2020 ones, that’s certainly been a learning experience. Can only imagine how long they’ll sit in some IRS warehouse before anybody even looks at them..
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