Understanding tax jargon: A simple guide

Navigating the financial world can be daunting, especially when you're faced with complex terms and concepts. Whether it's a tricky acronym, a new financial product, or unfamiliar tax rules, it's easy to feel overwhelmed. Financial jargon is one reason many people lack confidence in managing their finances (1). And just when you think you've got the hang of it, the rules can change. That's why turning to a specialist, like a financial adviser, can provide clear guidance and peace of mind.

Breaking down key tax terms

You don’t need to know every financial term to feel in control, but understanding the most used ones is a great start. Here are some key terms and what they mean:

1. What is an ISA?

An Individual Savings Account (ISA) is a tax-efficient way to save or invest. The interest/dividends generated from an ISA are free of income tax and any gains made upon disposal are free of Capital Gains Tax (see below for a helpful explanation of what this is). There are several types of ISAs, including:

• Cash ISAs: Ideal for saving money with easy access.

• Stocks and Shares ISAs: For investing in the stock market.

• Lifetime ISAs (LISAs): Designed for first-time homebuyers or retirement savings.

• Junior ISAs (JISAs): For saving on behalf of children.

You can contribute up to £20,000 annually into one ISA or across different ISAs, however Junior ISAs have a £9,000 limit. Lifetime ISAs have a maximum annual allowance of £4,000.

2. What is CGT?

CGT stands for Capital Gains Tax, a tax you pay on the gains made when selling an asset or investment that has increased in value. In the 2024/25 tax year, the first £3,000 of gain is tax-free—known as your annual exempt amount. This annual exempt amount will reduce in the 2025/26 tax year to £1500. Gains beyond this amount are taxable, with the rate depending on your tax bracket and the type of asset. The rules for CGT can be intricate, with various exemptions and rates. This is where professional advice can make a big difference, helping you navigate how and when CGT and CGT exemptions apply.

3. What is IHT?

Inheritance Tax (IHT) is a tax on the value of your estate when you pass away, although this can also occur when gifting monies during your lifetime. Estates valued below £325,000 (the nil-rate band) are exempt, while the remainder is taxed at up to 40%. An additional threshold, the Residence Nil-Rate Band (RNRB), may apply if you leave your home to direct descendants, but this is reduced for estates over £2 million. IHT can be reduced through exemptions, such as leaving assets to your spouse or civil partner, or through thoughtful planning like lifetime gifting or creating trusts. Understanding these options—and starting the conversation early—can help reduce the tax burden on your loved ones.

4. What is the pensions annual allowance?

The Pensions Annual Allowance is the maximum amount that can be contributed to your pension each year, currently set at £60,000. Contributions include those from you, your employer, third parties, (2) and the government (via tax relief). Unused allowances from the previous three tax years can sometimes be carried forward. Exceeding the annual allowance may result in significant additional tax charges.

5. What is pensions tax relief?

Pensions tax relief is a government incentive to boost your pension contributions. For basic rate taxpayers, a contribution of £80 becomes £100 thanks to 20% tax relief. For higher rate (40%) and additional rate (45%) taxpayers the relief is even greater, making pension contributions a highly efficient way to save for retirement.

6. What happened to the Lifetime Allowance?

The Lifetime Allowance, which capped the amount you could save into pensions before facing extra tax charges, was abolished in April 2024. While there’s no limit to total savings now, the maximum tax-free lump sum you can withdraw (usually 25% of your pension) remains capped.

Simplifying financial jargon

At Schroders Personal Wealth, we aim to transform the way financial advice is delivered by making it simple, accessible, and affordable for everyone. The financial world can often seem overwhelming with its complex terms, but understanding the basics is the first step to taking control of your money.

We believe in making financial advice straightforward and jargon-free. Our advisers are committed to explaining things clearly, so you always feel informed and confident. Financial rules and regulations are constantly evolving, so having a professional who communicates in an easy-to-understand manner can boost your confidence. This approach will help in creating a financial plan aligned with your goals.

Sources:

(1) 7 out of 10 UK adults are puzzled by financial jargon - Aviva plc

(2) Third parties could include people like parents or grandparents or another legal entity or trust.