I never even had a chance to write about the Truss/Kwarteng mini-budget, it was gone so fast! (and honestly, didn’t have much in the way of any special impact on Americans in the UK, beyond what everybody else would experience). The Sunak/Hunt Autumn Statement has some more intriguing effects, though, particularly on the “is an ISA worth the hassle” question.
Quick recap on the main points of the Autumn Statement – deeper information on the always-great MoneySavingExpert:
- Stuff that has no special impact on Americans, but could certainly have an impact on any individual:
- Benefits & State Pension rise by the 10.1% inflation figure, from April 2023
- Minimum wage rises to £10.42/hour from April 2023
- Reduction in the support to energy bills, with help focused on those less well off, as well as other cost-of-living and mortgage support for the needy.
- Council tax likely to rise more (can now do 5% without a referendum, instead of 3%)
- Electric vehicle owners will pay road tax from April 2025
- The 45% additional rate threshold falls from £150k to £125,140 (the point where the Personal Allowance phase-out stops), starting in April 2023. So the new thresholds are (income tax only, no NI):
- And a few with a bit of American-specific impact:
- Income tax thresholds frozen until April 2028: assuming US thresholds continue to increase with inflation, this will result in UK tax rates continuing to climb further above US ones. If you take the Foreign Tax Credit, this will result in increasingly more credit to carry over. No change to the basic fact that very few Americans in the UK will owe tax to the US, except in some fringe cases.
- The 45% additional rate threshold falls from £150k to £125,140 (the point where the Personal Allowance phase-out stops), starting in April 2023. So the new thresholds are as follows, supposedly for the next 6 years:
|Income Band||Tax Rate|
|£0 to £12,570||0% (Personal Allowance)|
|£12,570 to £50,270||20% income tax + 12% National Insurance|
|£50,270 to £100,000||40% marginal income tax + 2% National Insurance|
|£100,000 to £125,140||60% marginal income tax (40% plus loss of Personal Allowance at £1 for every £2 earned over £100k) + 2% National Insurance|
|Above £125,140||45% marginal income tax + 2% National Insurance|
This one means that people in that £125,140 to £150k band might pay up to £1,243 extra tax – all of that is likely extra Foreign Tax Credit to the US.
The other implication is that the Personal Savings Allowance now drops from £500 to £0 at £125,140, pushing some people towards using a Cash ISA or Premium Bonds instead of getting interest taxed at 45%
Dividend Allowance falls from £2,000 to £1,000 from April 2023, and again to £500 from April 2024. The rates stay the same: 8.75% for basic rate, 33.75% for higher rate, and 39.35% for additional rate taxpayers.
Capital Gains Allowance also falls, from £12,300 to £6,000 from April 2023, and again to £3,000 from April 2024. With the old allowance, it was fairly trivial to avoid paying UK capital gains tax unless you have some seriously big gains – at £3,000, that’s a lot harder. The rate stays the same, at typically 20% for higher and additional rate taxpayers.
Does this make an ISA more attractive?
Back in December 2021 I gave my thoughts on whether an ISA is worth it. Quick recap of the major pros and cons of a Stocks & Shares ISA:
- UK tax-free dividends & capital gains
- Deeper awareness/understanding of investing (debatable, up to you if this is a pro or con!)
- US taxable dividends and capital gains (same as a taxable brokerage account, but worse than an IRA or pension)
- No indexing: unless the UK chooses to diverge from the EU’s MiFiD rules, which could happen – definitely something I’m keeping an ear out for, and would dramatically change the evaluation. Or unless PFIC rules change (not expecting that to happen!).
- Likely a skewed, or at least less diversified, asset allocation, since you’re stuck with individual stocks and can only realistically manage so many
- Possibly higher fees, at least if you’re comparing an ISA to a US brokerage account (which is just about free)
- Bookkeeping: significantly more recordkeeping in order to be able to file US taxes accurately, compared to an IRA/pension or a US brokerage account
- Deeper awareness/understanding of investing (flip side of the coin!)
Impact of the Autumn Statement on ISAs
With the reduced thresholds for UK dividends and capital gains taxes, this changes the arithmetic around the key advantages of an ISA. I’d previously said that you start saving money on dividends tax at about £50,000 in an ISA, compared to a taxable account, assuming a 4% dividend yield resulting in £2,000 of annual dividends. That takes at least 3 years of maxed out ISA contributions (barring some exceptional gains!), with the willingness to accept the additional pain and lack of diversification in an ISA. Remember that you’re still going to have to pay US tax on dividends, even under the UK allowance.
From April 2024 with only a £500 dividend allowance, you’d now pay UK dividend tax at taxable balances of £12,500, with that same 4% dividend yield. That’s a much lower threshold, that many more people could reach in fairly short order or may already have in taxable accounts. If you got to that same £50,000 balance, you’d have £1,500 of UK-taxable dividends a year, paying probably £506.25 or £590.25 in UK tax, plus maybe some US tax on the £500 of dividend under the UK allowance. That’s roughly 25% of your dividends lost to tax – a 1% drag on your investment performance. When a lot of us are trying to keep expenses on our funds low, under maybe 0.2%, that’s a very significant drag.
As before, capital gains is harder to model, but with the capital gains allowance dropping from £12,300 to £3,000, what used to be a pretty easy tax to avoid becomes a real challenge, especially on long-term growth. Invest that £12,500 with 4% nominal capital growth (on top of the 4% dividend yield, reinvested), and 20 years later you’ve got about £23k of capital gains. At only £3k a year tax-free (and assuming that level stays frozen forever), it’d take you almost 8 years to withdraw your gains without paying UK tax, and that’s assuming only a single £12,500 investment. Invest more over the years and you could easily run out of retirement years before running out of capital gains – or you pay the tax.
So should I get an ISA?
Broadly speaking, the Autumn Statement makes ISAs more attractive from a tax perspective, but it’s still not a clear-cut choice for everybody. I reviewed my thinking from almost a year ago and I think it’s still the same general criteria. In summary:
An ISA is not worth it in any of these situations:
- Investments for after pension/SIPP access age, if you still have pension annual and lifetime allowances available
- You can access a Roth IRA and haven’t maxed it out
- You aren’t comfortable with individual stocks
- You plan on moving back to the US (unless that’s far in the future)
- NEW: You have/need enough cash savings or other interest-generating assets that you are better off using your ISA allowance for a cash ISA instead of stocks & shares
An ISA might be worth it, if you’re an American citizen in the UK and meet some or all of the following criteria:
- Expect to get above £12,500-ish fairly quickly (down from the original £50,000) – this is where you start saving some money on dividend taxes. Probably also a reasonable cutoff for where capital gains tax starts to become a challenge at only £3k allowance per year, for long-term investing.
- You can’t get non-PFIC index funds in a taxable account – if you’re forced into individual stocks anyway, may as well use an ISA
- You’re a tax-optimising investment nerd like me
- AND you don’t mind the extra recordkeeping, the reduced diversification, and possibly an impact on your asset allocation.
Personally, I’m not anticipating having spare money to invest in an ISA for at least a few years, and will prioritize my Roth IRA for any money that does become available. But if/when the cash becomes available, I expect I’ll restart my ISA experiment, probably using Interactive Brokers this time.
As for the other challenges from the Autumn Statement, there’s not much to be done to avoid them. Increase your pension contributions to stay under the frozen and dropped thresholds if you can, and you don’t need the money until pension age. Aside from that, I’m just going to build up more US Foreign Tax Credits I’ll probably never use.
Hope everybody is doing alright out there – the news can make some grim reading heading into the holiday season, but with Thanksgiving around the corner, I hope we all find a moment to pause and give thanks for what you do have.