To reflect the new tax year, this article has been updated
At a glance
- Getting your head around all the jargon used in financial services can get in the way of feeling confident about your money.
- Understanding the various tax terms and acronyms, such as IHT, CGT and the different pension allowances increases your financial wellbeing – and it could save you some tax, too.
- Even if you’re quite financially literate, tax rules can change from Budget to Budget – advisers can help you keep up to date without drowning in the detail.
Why does financial advice seem so complicated and confusing? Seven out of ten people see financial advice, and tax in particular, as riddled with jargon and convoluted explanations. In fact, one in three of us say that we don’t understand tax1.
That can undermine our confidence and put us off making decisions.
Understanding financial jargon
Unless you’re an expert or you’ve been investing for a while, you likely won’t get far before tripping over a tax term you’ve never heard of.
It could be a new acronym that’s suddenly popped up, a financial product with a name you’ve never heard of or a reference that just doesn’t seem to make sense. You’re not alone. Financial jargon can be a key reason why many people don’t feel confident about managing their money.
Plus, as soon as you think you’ve got your head around the latest tax rules, the goalposts move again. It can be difficult to keep up to speed. Not just with what something means but also what it covers.
No wonder it can be frustrating. The answer is to speak to someone who’s both an expert, and up to date with the latest changes – like a fully qualified financial adviser.
Top seven tax terms jargon–busted!
A full list of all the terminology used by the financial services industry would be pretty long – and it’s not necessary to know every single term in order to feel more in control. But it’s helpful to be familiar with some of the most widely used terms.
These are our top seven:
1. What does CGT stand for?
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, or the ’gain’. In this tax year, 2024/25, the first £3,000 of your 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 19812.
The rules and regulations around CGT are quite complex. Even when you understand the principle, 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 help you manage your tax. The main thing here is to understand when CGT applies and what it applies to, which a financial adviser can help with.
2. What does ISA stand for?
ISA stands for Individual Savings Account. This is a very tax-efficient, popular way 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 or Capital Gains Tax on any gains. There are five types – Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, Lifetime ISAs, and Junior ISAs, or JISAs.
You can invest up to £20,000 in 2024/25, spread across the different types of ISAs if you wish. The allowance for Junior ISAs is £9,000, and a maximum of £4,000 on Lifetime ISAs, which are specifically for people saving for a first home or retirement. Innovative Finance ISAs, Cash ISAs and- Lifetime ISAs are not available through SJP but a financial adviser can advise If It’s a good option for you, before you commit.
The government is also proposing to introduce a British Stocks and Shares ISA. depending on the outcome of its public consultation. This could mean an extra £5,000 additional allowance.
3. What does IHT stand for?
IHT stands for Inheritance Tax. This is the tax charged on the assets in your ‘estate’ that you leave behind when you die. It only applies when your estate is worth more than £325,000, and this tax-free threshold is referred to as the nil rate band. You’ll then usually be liable for up to 40% tax on the value of your estate over that amount subject to other thresholds being available including the Residence Nil Rate Band (RNRB) of £175,000. This is available when your main residence is left to a direct lineal descendant, however- this threshold may be reduced though where the estate is worth £2M or more.
Can you mitigate IHT? There are several exemptions – if you leave everything to your spouse or civil partner for example, this is free of IHT. In which case, IHT only becomes payable on the death of the surviving partner. In addition, there are a number of ways that you can help reduce how much IHT your family might have to pay when you’re gone.
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. This gets money flowing through families and across generations, making a real difference after you’ve gone.
But IHT is an area where people get concerned, partly because it can be complex, but also because it can be difficult to think clearly and practically about what happens to your money when you’re no longer around. Also, family conversations about money, especially who inherits what, can be quite challenging and emotional. It can help to have someone in the room who can explain all the options clearly but is one step removed from family.
Planning involving making lifetime gifts, either outright or to a trust can be very effective in reducing your IHT liability. Starting the conversation about IHT and legacy planning is something that a financial adviser can really help you with.
If you’d like to see how much Inheritance Tax you might pay on your estate, you can use our handy IHT calculator. It can be a good starting point for a conversation about legacy planning with your financial adviser.
4. What is the HMRC?
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.
5. What is the 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, 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- or £3,600, whichever is higher – in each tax year.
If you have not fully used your allowance in the previous three tax years then, subject to certain conditions, you can carry it forward for up to 3 tax years. Any amount paid in excess of your available annual allowance, including any carried forward will be subject to an income tax charge.
The pensions tax relief from the government acts as a cash boost to your pension. We explain how pensions tax relief is calculated below.
If you’d like to see how much your pension might be worth when you retire, you can use our handy Pensions calculator.
6. What is Pensions tax relief?
Pensions tax relief increases the amount paid into your pension by giving back some of the tax you have paid on your earnings. This is limited to 100% of your earnings or £3,600, whichever is higher.
The basic rate of tax relief is 20%. So, if you’re a basic rate taxpayer or don’t pay tax because your earnings are too low, an £80 personal contribution is worth £100 through tax relief.
If you’re a higher rate 40% taxpayer, you can claim another £20 through your self-assessment tax return. This effectively means your contribution could cost you £60, and the government pays £40.
And for those on the top rate of 45% tax, a £100 contribution costs £55, with £45 coming from the government. You’ll need to reclaim that additional tax relief when you submit your tax return.
7. Does the Lifetime allowance still exist?
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.
At the start of the 2024/25 tax year, the concept of the Lifetime Allowance was abolished, although there are still limits on the payment of tax-free lump sums, usually referred to as Tax Free Cash. You can generally draw down 25% of your pension as a lump sum tax-free. After that, income drawn in your lifetime will be subject to Income Tax.
Keeping financial jargon simple
These are some of the key bits of tax jargon that you may come across. But it’s an industry that adds to its jargon every year, and one where rules and regulations can change, especially around Budget time.
Never worry about asking your adviser to explain a term. Most advisers are more than happy to offer a simple explanation – they are here to provide clarity and ensure you fully understand the pros and cons, 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 wellbeing.
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 generally dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
Please note that St. James’s Place do not offer Cash, Innovative or Lifetime ISAs.
Sources:
1Post Office survey, personal loans, financial jargon explained (based on a survey sample size of 2,000 UK adults in March 2022)
2Growth Capital Ventures, May 2023
SJP Approved 17/04/2024