When looking at products or services, it can be all too easy to get bogged down by the jargon – and this can be a particularly common barrier in the world of financial services. Unless you’re an expert or in the industry, you likely won’t go far before coming across a term that you don’t understand – from new acronyms to mystifying references and products with a name you’ve never heard of.
If this sounds all-too familiar, you’re far from alone. Three in 10 adults find financial products and services confusing, due largely to financial jargon and complex terminology, and it’s a key reason why more than a third of UK adults have little or no confidence in their financial abilities.1
The list of financial-services terminology is long and exhaustive. But there are some terms it’s especially important to be familiar with. Here are some of the tax terms and acronyms you’re likely to come across, with a brief ‘plain English’ explanation of each.
Capital Gains Tax (CGT for short) is one of the most complex taxes to understand, so it’s easy to fall into the trap of paying unnecessarily or end up being fined for not paying when you should.
Essentially, it’s charged on the profit you get from selling an asset or investment that has increased in value (but it applies only to the gain you make). Gains from almost any kind of personal possessions can be liable to CGT, including shares that are not held in a pension or ISA wrapper, buy-to-let properties, jewellery or paintings, or even antiques, which is where people often fall foul of the tax.
There’s an annual CGT allowance – currently £12,300 – which means you’re not charged CGT on profits below that amount. There are different levels of CGT, depending on your tax band and the asset you’ve made a gain on, as well as some CGT exemptions. You can also split your gains over two tax years and make use of tax-free transfers to your spouse – although this can be complicated, so it’s worth seeking expert advice!
ISA stands for Individual Savings Account. With no income tax due on the interest or dividends you receive from an ISA, these are a very tax-efficient way to save and invest. There are five types – Cash ISAs, Stocks & Shares ISAs, Innovative Finance ISAs, Lifetime ISAs and Junior ISAs. The annual allowance is currently £20,000, which can be used across the different types of ISAs (although there are lower annual limits of £4,000 and £9,000 on Lifetime and Junior ISAs respectively).
Check out our top tips for ISA success here.
Inheritance Tax (or IHT) is charged on the ‘estate’ you leave behind when you die. It only applies when your estate is worth more than £325,000 (the nil rate band), with up to 40% charged on the amount above that. There are several exemptions (for example, there’s no IHT charged if you leave everything to your spouse or civil partner) and a number of ways to reduce the IHT bill you leave your family when you pass away.
Read our tips on mitigating your IHT liability here.
Pensions annual allowance
A pensions annual allowance is the amount you can contribute to your pension in a tax year while still benefiting from tax relief (currently the lower of 100% of your earnings or £40,000 but reducing by £1 for every £2 of adjusted income you earn over £240,000). You may be able to carry forward any unused annual allowance from the past three tax years.
Read more about getting your pension in shape here.
Pensions tax relief
This is the top-up you get from the government when you pay into a pension. Tax relief on pension contributions is paid at your marginal tax rate, which means basic-rate taxpayers get 20% relief; higher-rate taxpayers, 40%; and additional-rate taxpayers, 45%.
The term ‘tax wrapper’ refers to a product that can be wrapped around your savings to shelter them from tax. Both ISAs and pensions are commonly referred to as tax wrappers.
This is the maximum amount of pension savings you can build up over your lifetime without facing a potential tax charge. It currently (2021/22) stands at £1,073,100, having been as high as £1.8 million a decade ago. It’s expected to stay at the current level for the next five years, but this is subject to change.
A lot of people might not be aware of this allowance because they don’t expect to save enough, but when you think about how many years you might be investing into a pension, it’s not unreasonable to think more people might hit that allowance, especially as we don’t know what the cap will be in future.
HMRC is short for Her Majesty’s Revenue & Customs, the government department responsible for collecting taxes.
Remember that the above list is just a selection of some of the more important tax references you’re most likely to come across. The full list of acronyms and terms is long, however, and the details of the different tax rates, how they work and what they apply to can change all the time.
Cutting through the noise
Jargon can be confusing and therefore off-putting; however, remember that you can’t be expected to know what absolutely everything means. A financial adviser will help you keep up to speed, and will be more than happy to offer a simple explanation to make sure you don’t get lost in all the terminology.
At Wellesley, we’re here to provide clarity and ensure you fully understand what you’re doing, why and what everything means. Give us a call on 01444 244551.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
A Stocks and Shares ISA does not have the security of capital associated with a Cash ISA.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
Please note that St. James’s Place do not offer Cash, Innovative or Lifetime ISAs.
1 TSB money confidence barometer, TSB, June 2021 (Based on a survey sample size of 5,000)