W1M’s Glossary of Tax Vehicles Part 1: UK Tax Vehicles

Tax vehicles. They may not be the most exciting topic in the world but employed correctly they can be an important tool in your wealth planning strategy, equally, if they’re mismanaged, they can result in unnecessary tax consequences. As an American overseas, if the disparity between tax vehicles on either side of Atlantic are not managed properly the result can be some pretty hefty, unwanted and unnecessary tax bills.

We’ve put together a glossary of terms of the main UK tax vehicles and included the matters for international Americans to bear in mind when using them.

Individual Savings Accounts (ISA)

Tax free saving accounts within the United Kingdom. An ISA provides a tax wrapper for assets to shield the account from both income and capital gains tax. The main types of ISAs are:

• Cash ISAs – Typically offered by high street banks and offer a fixed rate of return on the cash deposits.
• Stocks & Shares ISA – Monies can be invested into various financial instruments, including stocks, gilts, or collective schemes (like Unit or Investment trusts). The maximum contribution for the 25/26 tax year is £20,000.
• Innovative Finance ISA – Allows peer-to-peer lending with the interest received being tax-free.
• Lifetime ISA (LISA) – The aim of a LISA is to encourage saving towards a house deposit with the government offering to contribute 25% (£1,000) of the £4,000 maximum annual investment limit. Alternatively, LISAs can be utilised for retirement saving.
• Junior ISAs (JISAs) - Available for children under the age of 18 years old. The maximum contribution for JISAs is £9,000 for 2025/26. The investment income within JISAs are not taxable for the child or the donor.

A common misconception is Americans cannot invest in ISAs. The following two reasons show how they can be an effective tool for Americans in their tax planning arsenal:

Firstly, the ISA wrapper is viewed as a ‘see through’ by the Internal Revenue Service (IRS), this means for American taxes they will treat an ISA like a regular brokerage account and ignore the tax wrapper part. Therefore, an American taxpayer would still be liable to report and pay tax on the income and gains to the US. As the wrapper provides protection from UK taxation, there is a marginal benefit for interest earnings. To provide a comparison; the US top rate of tax is 37%, compared to the UKs 45%. This 8% differential can be significant when compounded over many years.

The second reason is not the ISA structure itself, but the underlying investments held within. The IRS has a discriminatory view on non-US funds, classifying them as Passive Foreign Investment Companies (PFICs), and punitively taxing the arising income from such investments. Whilst these UK funds offer great diversification benefits to UK investors, a US person should invest directly in stocks of companies to avoid the potential pitfalls of PFICs.

Pensions

Workplace

The most popular scheme is the workplace pension, the UK government recognised there was a lack of retirement saving within the country and employed nudge theory to reduce the burden on the State pension needs and maintain the standard of living. The Nudge theory is a behavioural economics concept which aims to indirectly influence an individual or groups decisions. From 2018, the Government have auto-enrolled all work-aged persons, above the age of 22, into pension schemes.

In essence this means that employers are required to pay a small percentage into their employees’ pension every year, the amount is usually taken as a percentage of earnings, but this can vary.

Self Invested Pension Plan (SIPP)

A Self Invested Pension Plan (SIPP) is a type of pension which allows UK investors to save for retirement and choose your own investments in the process. A SIPP, like most UK pensions, grows tax-free, and tax relief is available on pension contributions at the point of contribution. However, the distributions from a SIPP are taxed at income rates.

• Annual Contributions - An individual can contribute £60,000 in 2025/26 to registered pensions schemes, however this figure may change depending on carry forward allowances or tapering down rules.
• Lump sum allowance for pensions is £1,073,100. If a pension fund exceeds the lump sum allowance at the point of retirement, the excess can be taxed at unfavourable rates.

How does someone benefit from using a SIPP?

As mentioned previously the investments within can grow tax-free within pension pot. At retirement a tax-free lump sum of 25% can be withdrawn from your pension, known as the pension commencement lump sum (PCLS).

Can an American benefit from a SIPP?

In short, yes. The issue comes around the reporting, generally, a pension scheme is not reportable, nor taxable. However, the IRS guidelines are a little unclear and the SIPP can be viewed as a foreign trust and therefore will need to report to the IRS according.

State Pension

In order to qualify for a full State Pension (almost identical to the US social Security but we’ll cover that in part 2), you must have paid in 35 years of qualifying national insurance to obtain the full state pension amount.

This entitles you to a regular payment from the UK government of £230.25 a week. There are a variety of factors that can change this such as gender, marital status and the number of qualifying years. If you are coming up to the state pension age, 67 from 6 April 2026, it may be worth considering making voluntary contributions to ensure you receive the maximum amount possible.