At a glance:
When it comes to navigating the world of financial services, there’s one barrier that many people struggle to overcome – the jargon. Unless you’re an expert or you have experience in the industry, you likely won’t go far before coming across a term that you don’t understand.
Whether it’s an acronym you haven’t seen before, a product with a name you’ve never heard of or a reference that just doesn’t make sense, you’re far from alone. Three in ten adults find financial products and services confusing, due largely to financial jargon and complex terminology, the first TSB money confidence barometer revealed in June.1 This is a key reason why more than a third of UK adults have little or no confidence in their financial abilities, according to TSB.
“It can be difficult to keep up to speed with not just what something means but also what it covers, because rules change over time,” points out Tony Clark, Senior Propositions Manager at St. James's Place Wealth Management.
“No wonder it can be mystifying to a lot of people – this is understandable and normal. The answer is to speak to an adviser.”
The list of financial-services terminology is long and exhaustive. But there are some terms it’s especially important to be familiar with, such as the main tax references. Here are some of the tax terms you’re likely to come across, with a brief ‘plain English’ explanation of each.
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).
CGT is short for Capital Gains Tax, which is charged on the profit you get from selling an asset or investment that has increased in value. However, there is 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. “The main thing here is to understand when it applies and what it applies to, which your adviser can help with” says Clark.
IHT stands for Inheritance Tax, which 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.
“It’s important to understand what gets taxed and what doesn’t,” says Clark. “For instance, pensions can fall outside your estate and be a good asset to pass onto the next generation. But IHT is an area where people get concerned, partly because they might not fully understand it.”
HMRC is short for Her Majesty’s Revenue & Customs, the government department responsible for collecting taxes.
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.
Lifetime allowance 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,” says Clark. “But when you think about how many years you might be investing into their pensions for, 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.”
Pensions tax relief 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%.
This 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. Unless you’re an expert, you can’t be expected to know what everything means and keep on top of all the changes. The best approach, therefore, is to speak to an expert, such as a financial adviser.
“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 there to provide clarity and ensure their client fully understands what they’re doing, why and what everything means.”
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)
As a Chartered Financial Planner and Fellow of the CII, I have satisfied rigorous criteria relating to professional qualifications and ethical good practice.
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