Financial Jargon Explained

• Capital Gains Tax (CGT)
• Compound Interest
• Tax Code
• National Insurance
• Inheritance Tax
• Shares, unit trusts, investment trusts
• Childcare Vouchers
• Child Tax Credits
• Working Tax Credit
• Interest Rates
• Personal Allowances 
• Property or 'capital'
• Trustee
• Settlor
• Beneficiary
  

Capital Gains Tax (CGT)

A CGT is a tax charged on capital gains, the profit gained from selling an asset that was purchased at a lower price. The most common capital gains usually result from the sale of stocks, bonds, precious metals and property. You, as with everyone else, are exempt from CGT up to a certain amount of capital gains per year. For the 2007/8 tax year this "personal exemption" is £9,200.

If you are resident or ordinarily resident in the United Kingdom (and trustees of various trusts), you are subject to a capital gains tax.  Exceptions to this include principal private residences, holdings in ISAs or gilts. You do have an individual annual capital gains tax allowance: gains below this allowance are exempt from tax, and capital losses can be set against capital gains in other holdings before taxation.

You must pay capital gains tax at your highest marginal rate of income tax.  However, since 6 April 1998, you can now claim taper relief.  This reduces the amount of your gain that is subject to capital gains tax, thus reducing your effective rate of tax.  This will depend on whether your asset is a "business asset" or a "non-business asset" and the length of the period of ownership.

As a taxpayer, you are exempt from CGT on your principal private residence. Certain other gains are allowed to be rolled over upon re-investment. Investments in some start-up enterprises are also exempt from CGT. The sale of a family business can be exempt from CGT upon retirement. Source: Wiki 

Compound Interest

Compound interest is the measurement of payable interest that has been added onto the original principal. When new interest is calculated, it is based not only on the original principal, but also on the interest that has been added to that principal. The more frequently interest is calculated or compounded, the faster the principal grows.

Interest rates must be comparable in order to be useful. Since most people think of rates as yearly percentages, many governments require financial institutions to disclose the comparable yearly interest rate on deposits or advances. This basic rate is the simple interest rate which does not add the interest to the principal; it refers only to interest is earned or owed only on the original principal. In contrast, compound interest rates can be referred to as: Annual Percentage Yield, Annual Equivalent Rate, Effective Annual Rate, Effective Annual Interest, Effective Compound Interest.  Interest is accrued due to the time value of money. Source: Wiki

Tax Code

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In the UK, if you get paid under the PAYE scheme, you have been allocated a tax code. This is in the form of a number followed by a letter or letters. The code determines the amount of the tax free income you receive before tax deductions occur. Tax codes are frequently reviewed, and if necessary adjusted, at least once a year, to take account of the tax paid during the year, and to account for any variations in your income.  Source: Wiki

Income Tax

Income tax is a tax paid on income. It is paid by employees and people who are self-employed and may also be payable if you are not working but you have an income such as a retirement or occupational pension. Not all types of income are taxable and it will seldom be the case that all of your income is taxed. There is no minimum age at which a you become liable to pay income tax: what matters is your income. If this is below a certain level, no tax is payable.

There is no single definition of income in tax law. Income tax law divides various types of income into schedules. If an item comes within a schedule it counts as income and income tax must be paid on it. The way the tax must be paid will depend on which schedule it falls into. The most common schedules are Schedule E for employees and Schedule D for the self-employed.  Source: adviceguide.org.uk

National Insurance

National insurance is a scheme where people who work make payments towards benefits. The payments are called national insurance contributions and certain benefits are only payable if you meet the national insurance contribution conditions. National insurance contributions also go toward the costs of the National Health Service. The national insurance scheme is administered by the HM Revenue and Customs (HMRC).

If you claim a benefit or tax credits, you will need a national insurance number. This applies even if it is not a benefit which depends on national insurance contributions. You will also need to supply your national insurance number in other circumstances, for example, when you get a new job. Source: adviceguide.org.uk

Inheritance Tax

Inheritance Tax is the tax that is paid on your 'estate'. Broadly speaking this is everything you own at the time of your death, less what you owe. It's also sometimes payable on assets you may have given away during your lifetime. Assets include things like property, possessions, money and investments. Source: direct.gov.uk

Shares, unit trusts, investment trusts

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Shares, unit trusts and investment trusts are all medium to longer-term investment products. The returns are potentially higher than with savings, but they are not guaranteed. It's a good idea to get advice before investing in these sorts of products.  Source: direct.gov.uk

If you are working, your employer may offer childcare support in the form of childcare vouchers. Vouchers can be used for many kinds of childcare, but the provider you have in mind must be registered with Ofsted or be approved under the voluntary Childcare Approval Scheme. The Childcare Voucher Scheme involves giving up some of your pay in exchange for the childcare vouchers and there are tax advantages if you choose to partake in this scheme. However, if you accept a cut in pay this could reduce your salary to a sum below the lower earnings limit and affect your rights to certain benefits. Your State Pension, Maternity Allowance, Statutory Maternity Pay, Statutory Paternity Pay and tax credits could all be affected if your pay falls below the lower earnings limit.  For a video explanation, please watch this. Source: adviceguide.org.uk

Child Tax Credits

Nine out of ten families with children can get tax credits. Child Tax Credit is a means-tested allowance for parents and carers of children or young people who are still in full-time non-advanced education or approved training. If your family income is no more than £58,175 a year (up to £66,350 if you have a child under age one), you can claim Child Tax Credit. The amount you receive depends on various things, including your annual income. The payment is made up of two elements: 1) a family element paid to any family with at least one child and worth up to £545 (2006-2007 tax year) 2) a child element paid for each child in the family and worth up to £1,765 (2006-2007 tax year). Source: direct.gov.uk

Working Tax Credits

Nine out of ten families with children can get tax credits, but you don't need children to qualify for Working Tax Credit. If you have a low income level, work 16 or more hours a week, and are employed or self-employed, you can qualify for Working Tax Credits.  Extra help is available for those of you working 30 or more hours per week, have a disability, or are aged 50 or over and returning to work after a period on benefit. Source: direct.gov.uk

Interest Rates

A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve policies. For example, if a lender (such as a bank) charges a customer £90 in a year on a loan of £1000, then the interest rate would be 90/1000 *100% = 9%. Source: Investorwords.com 

Personal Tax Allowances

If you live in the UK, you are entitled to an Income Tax personal allowance. This is the amount of income you can receive each year without having to pay tax on it. Depending on your circumstances, you may also be able to claim certain other allowances. For the current personal allowance rates, please click here. direct.gov.uk

Linked Savings Account

The mortgage holder saves money by only paying interest on the difference between the amount borrowed and the amount in the linked savings account. For example, you have a £100,000 mortgage and you decide to offset £20,000 of savings to pay for your children's school fees, you will only pay mortgage interest on £80,000 all the time that the savings are in the account.

Property or 'capital'

• land or property
• shares
• money
• antiques or other valuable property

Settlor
A settlor is a person who sets up a trust or makes a settlement by means of property (you, the child's parents).

Trustee
A trustee is a person appointed to manage and safeguard the assets of a trust. The trustee is the 'legal owner' of the trust property (you/grandparents/godparents etc.).

Beneficiary
A beneficiary is a person who benefits from a trust set up on his/her behalf (your child).

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