From new acronyms to a financial product name you’ve never heard of or a reference that just doesn’t seem to make sense…if you’ve ever felt mystified by financial wording, you’re not alone.
In fact, seven out of 10 people see financial advice as full of jargon and convoluted explanations, making us feel less than confident about our decisions. What’s more, one in three of us say that we don’t understand tax.1
There’s no shame in being confused by financial terminology. Even if you’re financially literate, tax rules can change from Budget to Budget, meaning the goalposts move again. But understanding the key terms, such as ISAs, IHT, CGT and the different pension allowances, increases your financial well-being – and it could save you some tax, too!
A good place to start is by speaking to someone who’s both an expert and up to date with the latest changes – like a fully qualified financial adviser.
Jargon-busting seven key tax terms
A full list of financial services industry terminology would be rather lengthy – and it’s not necessary to grasp every single term in order to feel more in control. But it’s helpful to be familiar with some of the most commonly used acronyms and terms.
These are our top seven:
CGT stands for Capital Gains Tax. This is the tax you pay if you sell an asset or investment that has increased in value while you owned it; you pay tax on the increase in value, known as the ‘gain’.
Until the end of the 2023/24 tax year, the first £6,000 you gain is tax-free – this is sometimes called your annual exempt amount. If you’ve made more profit than that, you’ll be liable for CGT.
The CGT exemption has been falling since 2023, and it’s now at its lowest rate since 1981.2 Next tax year, the allowance will drop to £3,000.
The rules and regulations around CGT are quite complex, as 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. This is an area where professional financial advice can really come into its own.
Standing for Individual Savings Account, ISAs are very tax-efficient, popular ways to save and invest because you don’t pay:
- Income Tax (the tax you pay on your earnings) on any interest or dividends you receive
- Capital Gains Tax on any gains.
There are five types: Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, Lifetime ISAs and Junior ISAs (also known as JISAs).
You can invest up to £20,000 in any tax year, spread across the different types of ISAs if you wish. The annual allowance for Junior ISAs is £9,000 and a maximum of £4,000 for Lifetime ISAs, which are specifically for people aged between 18 and 40 who are saving for a first home or retirement. Lifetime ISAs are not available through Wellesley or St. James’s Place, but a financial adviser can advise if it’s a good option for you, before you commit.
IHT is an acronym for Inheritance Tax. This is the tax charged on the ‘estate’ you leave behind when you pass away.
It only applies when your estate is worth more than £325,000 – this tax-free figure is referred to as the nil rate band. Your estate is then liable for up to 40% tax on the value over that amount, subject to other allowances being available. One of these is the Residence Nil Rate Band (RNRB), which applies when your main residence is left to a direct lineal descendant.
There are several IHT exemptions. For example, if you leave everything to your spouse or civil partner, IHT is only payable on the death of the surviving partner.
What’s more, you can reduce how much IHT your family might have to pay in a number of ways – making lifetime gifts, either outright or to a trust, can be very effective in reducing your IHT liability.
It’s important to understand what gets taxed and what doesn’t when you die. For instance, pension funds generally fall outside your estate, which means they’re a great asset to pass onto your family.
IHT can be daunting, both in its complexity and also because it’s an emotive topic for both you and your loved ones. S tarting the conversation about IHT and legacy planning is something that a financial adviser can really help you with.
HMRC stands for His Majesty’s Revenue & Customs, the government department responsible for collecting all taxes and assessing how much tax you need to pay.
Pensions annual allowance
The pensions annual allowance is the maximum amount that can be paid into a pension each tax year. This includes contributions from yourself, your employer and any third party, as well as tax relief paid to the pension. The current annual allowance is £60,000.
However, you’ll only personally get tax relief on contributions up to 100% of your earnings if your earnings are less than the £60,000 annual allowance, or £3,600 – whichever is lower – in each tax year.
You can carry your allowance forward for up to three tax years if you haven’t fully used it.
Any amount paid in excess of your available annual allowance, including any carried forward, will be subject to an income tax charge.
What is pensions tax relief?
Pensions tax relief increases the amount you pay into your pension by giving back some of the tax you have paid on your earnings. Subject to the maximum £60,000 annual allowance, this is limited to 100% of your earnings or £3,600 if lower.
The basic rate of tax relief is 20%, while it’s 40% for higher rate taxpayers and 45% for those on the top rate of tax.
Prior to 6th April 2023, if you had pension savings over the Lifetime Allowance, you would pay additional tax charges on the excess when the benefits were accessed. These charges were removed from the 2023/24 tax year, so the most you will pay on your pension will be income tax when accessed this year.
The Lifetime Allowance is being removed from 2024/25, although there are still limits on the payment of tax-free lump sums, usually referred to as ‘Tax-Free Cash’. All income drawn in your lifetime will be subject to income tax.
Making financial wording more accessible
Remember that you’re not alone in being confused by financial jargon or acronyms – after all, as the statistic at the start of this blog shows, many people can struggle with them.
We’ve covered some key bits of tax jargon that you may come across ahead of tax year-end. But the financial industry is continually adding to its jargon, especially as rules and regulations change.
A financial adviser can 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 you’re doing it and what everything means. Always get in touch if you come across a term or an explanation that appears to make no sense. Feeling confident and in control of your money is one of the key drivers of financial well-being.