Tax year-end: How to bust the jargon of your finances

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 terminology.

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’. 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. Next tax year, however, this allowance will drop to £3,000 In 2024/25. 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. 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 – 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 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. Lifetime ISAs are not available through SJP but a financial adviser can advise If It's a good option for you, before you commit.

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.

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.

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 if your earnings are less than the £60,000 annual allowance, or £3,600 – whichever is lower – in each tax year.

If you have not fully used your allowance in the previous three tax years 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.

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6. 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. This is limited to 100% of your earnings or £3,600 if lower.

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. These charges were removed from the 2023/24 tax year and so the most you will pay on your pension will be income tax when accessed this year.

In 2024/25 the concept of the Lifetime Allowance is being removed, 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.

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’s an industry that adds to its jargon every year, and one where rules and regulations can change, especially around Budget time.