With the festive period officially over and all the January sales coming to a close, it’s that special time of year where everyone sobers up and gets serious.
First up on the super-serious-things-no-one-likes-to-think-about calendar are UK taxes. Yep, if you haven’t submitted them yet, they’re due 31 January.
The tax year in the UK runs from 6 April to April 5, which is an unwelcome inconvenience for US expats — our US tax year follows the calendar year (1 January to 31 December).
Every UK tax year (6 April to 5 April), UK residents are allowed to squirrel away about £15,000 tax free in a special interest-bearing account called an ISA — our UK word of the week!
What is an ISA?
ISA stands for Individual Savings Account. Put simply, and ISA is a tax-free savings account. They come two major forms: cash and investment.
Each year UK residents are given an allowance to deposit money in their ISA account(s) tax free. For the 2016/2017 tax year, the allowance is £15,240 – the rough equivalent of $24,000 USD.
Quirky Things to Know About ISAs
- The £15,240 annual allowance means you can deposit no more than a combined £15,240 in your ISA accounts between 6 April 2016 and 5 April 2017. However, you are free to divide your allowance up as you wish.
- For instance, you can choose to deposit £5,240 in an Investment ISA and £10,000 in a Cash ISA.
- You can only open one Cash ISA and one Investment ISA per UK tax year
- You can either maintain multiple ISA accounts as the years progress, or roll existing ISA accounts into a new account without suffering any consequences (from a tax perspective)
- Most cash ISAs allow you to withdraw money without penalty. However, once you reach your annual allowance, you will not be able to deposit any additional funds into your ISA for the remainder of the tax year.
- Say you deposit £15,000 into an ISA account on 10 April 2016 and withdraw £10,000 from the account on 15 April 2016. Even though your ISA balance is now only £5,000, you will only be allowed to deposit £240 for the remainder of the tax year (until 5 April 2017).
Opening an ISA
Anyone over 16 who is a UK resident for tax purposes is generally allowed to open an ISA. This includes work permit holders. All major banks offer both Cash and Investment ISAs. Interest rates vary between banks and various ISA offerings.
Welp, that just about covers the basic overview of what an ISA account is! Coming from the US it took me a while to figure out how they work, so if you are confused like I was about ISAs, I’m hoping this will help
Girl in London