Wealth Management

Your tax-year end jargon buster

Adrian Howard
May 14, 2024

Ever felt mystified by the amount of jargon around financial planning? Here are our top seven terms explained.

At a glance

  • Everybody has the right to feel money-confident about looking after their finances, but research shows many people still see tax jargon as a real barrier to financial wellbeing.
  • Understanding the various tax terms and acronyms, such as ISAs, IHT, CGT and the different pension allowances increases your confidence and peace of mind.
  • Even if you’re quite financially literate, tax rules and references can change from Budget to Budget – advisers can help you keep up to date without drowning in the terminology.

Making confident choices about managing your money and your tax affairs should be simple. Confusing terminology and convoluted explanations leave 7 in 10 people1 feeling overwhelmed by jargon when it comes to financial planning.

Understanding financial jargon

Unless you’re an expert or you’ve been investing for a while, you likely won’t go far before tripping over a 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 jargon or 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,” points out Tony Clark, Senior Propositions Manager at St. James's Place.

“No wonder it can be mystifying to a lot of people – this is understandable and normal. 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 and acronyms explained

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 up-to-speed, and 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 profit. Until the end of the 2022/23 tax year, the first £12,300 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 will drop to £6,000 in 2023/4 and then down to £3,000 in 2024/25.

The rules and regulations around CGT are quite complex, even when you understand the principle, since 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” explains Tony Clark. “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. These are very tax-efficient, popular ways to save and invest, because you don’t pay Income Tax - the tax you pay on your earnings – or Capital Gains Tax on any interest or dividends you receive. There are five types – Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, Lifetime ISAs, and Junior ISAs.

You can invest up to £20,000 in any tax year, 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.

3. What does IHT stand for?

IHT stands for Inheritance Tax. This is the tax charged on the ‘estate’ you leave behind when you die. It only applies when your estate is worth more than £325,000, and this tax-free figure is referred to as the nil rate band. You’ll then be liable for up to 40% tax on the value of your estate over that amount subject to other allowances being available.

Can you avoid IHT? There are several exemptions – if you leave everything to your spouse or civil partner for example, IHT only becomes payable on the death of the surviving partner. And 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,” says Clark. “For instance, pensions can fall outside your estate which means they’re a great asset to pass onto the next generation. 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.”

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 you can pay into your pension in one tax year, and still get tax relief from the government. You can pay in as much as you like, until you reach the pension Lifetime Allowance of £1,073,100. However, you’ll only get tax relief on contributions up to 100% of your earnings, or £40,000 – whichever is lower – in each tax year. You can, however, carry forward unused allowances for up to 3 years.

The pensions tax relief from the government acts as a cash boost to your pension. We explain how pensions tax relief is calculated below.

6. What is Pensions tax relief?

Pensions tax relief is the cash boost you get from the government on the first £40,000 you pay into your pension in any tax year. This increases the value of every pound you contribute.

The basic rate of tax relief is 20%. So, if you’re a basic rate taxpayer, an £80 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. You pay £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. What is the Lifetime allowance?

The Lifetime allowance is the maximum amount of pension savings you can build up over your lifetime without facing a potential tax bill.

The 2022/23 Lifetime allowance is £1,073,100. It’s expected to stay at this level until 2028 – but it could change. “A lot of people might not be aware of this allowance because they don’t expect to save enough,” says Clark. “But when you think about how many years you might be investing into your pension, or if you took out a pension early in your career, you might be closer to hitting the ceiling of the Lifetime allowance that you expected.”

Keeping financial jargon simple

These are some of the key bits of tax jargon that you may come across, especially as we come up to tax-year end. But it is an industry that adds to its jargon every year, and one where rules and regulations can change.

“There’s no harm in talking to an adviser and asking them to explain something or to help you understand what certain terms mean,” says Clark. “Most advisers are more than happy to offer a simple explanation – they are here to provide clarity and ensure their client fully understands what they’re doing, why 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.

Please note that St. James's Place do not offer Cash, Innovative or Lifetime ISAs.