Money Glossary

The world of finance is full of language that we weren’t taught at school, so it’s not surprising that many people find it confusing. Here is a helpful Glossary of Terms that demystifies the language of money.

If there’s a word or phrase that isn’t here, email hello@money-fit.co.uk and we’ll add it to the glossary.

Annual Equivalent Rate. See also Interest. AER is used by financial services providers such as banks and building societies to illustrate how much interest is paid if it was worked out once over a year. AER is most commonly used to illustrate interest payable on savings, whereas APR is used to illustrate interest payable on loans such as mortgages and credit cards. AER is an effective way to compare different products as the rate is calculated based on the same annual time period.

Example: If interest is paid on savings on a quarterly basis at 5%, the cumulative impact of interest paid over the year is actually 5.07%, so the AER is 5.07%. This is because at the end of the first quarter, a £100 balance will earn £1.25 and be added to the £100 balance = £101.25 which will then accrue interest for the following quarter and so on, making the total interest AER 5.07%. AER then takes into consideration the frequency of interest calculated to provide a benchmark comparison over an annual period.

Action: Check out the Savings Interest Modeller to see how interest on savings grows over time.

An annuity is a financial product that can be purchased to provide a guaranteed income for a specific period of time, or until death. Annuities are most commonly associated with providing a guaranteed income during retirement. An individual uses the money in their pension pot to purchase an annuity, which can either be fixed term (for a defined period of time) or lifetime (until death). An Enhanced Life annuity gives higher income rates to individuals with complex or life-threatening illnesses or other lifestyle risks (because, unfortunately, they are likely to need the funds for less time). Individuals should seek financial advice before considering purchasing an annuity.

Annual Percentage Rate: See also Interest Rate. APR is used to illustrate the total cost of a loan each year which includes interest charged plus any fees or set up costs involved. As with AER, interest on a loan may be, for example, 5% but if the interest is charged quarterly, the APR will be higher, as APR calculates the costs of the loan over a year. The lower the APR, the cheaper it is to borrow money. A number of factors can impact the APR that lenders will offer borrowers including their credit score, amount borrowed and duration of the loan.

Action: Have a look at the Loan Interest Modeller to see the impact of APR interest on loans such as mortgages and credit cards.

Assets are anything of financial value owned by an individual (e.g. car, laptop, shares) or by an organisation (e.g. property, machinery, technology). An asset manager manages investment assets on behalf of individuals or companies, making investment decisions for their clients to grow their wealth and maximise potential return on investment.

Introduced in 2012 and requires all employers (even those who have just one member of staff) to automatically enrol certain members of staff into a pension scheme and make contributions towards it. Auto enrolment was introduced to help ensure that more workers have access to a workplace pension, enabling them to save towards their retirement and enjoy a retirement income over and above what they will receive from the state pension. The minimum total pension contribution required under auto enrolment is currently 8%, of which the employer must pay at least 3%. Some employers opt to pay more than 3%, but cannot pay less than 3% unless the employee voluntarily opts out of the company pension scheme. Employers are legally obliged to automatically enrol the majority of their staff; however, there are a few exceptions, e.g. employees under 22 years old, and/or earning less than £10,000 pa. For full details, check out the Introduction to Auto Enrolment on the Money Helper website.

Interesting Fact: For an employee earning £20,000 a year, who is auto enrolled into the company pension scheme at the minimum contribution levels of 5% employee and 3% employer contributions, it costs the employee £45.86 to have £91.73 paid into their pension pot. This is based on the employee contribution of £57.33 (including £11.47 tax relief) and the employer contribution of £34.40 on qualifying earnings. The value of pension investments can fall as well as rise.

Additional Voluntary Contribution. Most employees in the UK make regular contributions into their pension savings account. The regular contributions are made from their salary as an agreed percentage of their salary, e.g. 5%, and the employer also contributes towards the pension savings account. An additional voluntary contribution is an additional payment, either as a lump sum or regular payment, that the employee chooses to make into their pension savings account over and above their regular agreed amount. For example, if the employee has received an end of year bonus they may choose to make an AVC into their pension.

Bank Automated Clearing System - a system for sending money electronically between banks. BACS payments take up to three working days to clear.

Credit card companies offer new customers a lower, and sometimes 0%, interest rate on debt transferred from another credit card to theirs. A balance transfer fee of up to 3% of the balance being moved is usually payable, and the follow-on rate may be higher than the current card.

Action: Check out the Loan Interest Modeller to see the impact of interest payments on credit card debt.

The interest rate that the Bank of England pays to commercial banks that hold money with it. The rate influences how much banks charge people to borrow money and how much interest is paid on their savings. The Bank of England’s Monetary Policy Committee (MPC) meets monthly to review economic data and vote on the base rate for the next period. When the base rate changes, normally banks change their interest rates on savings and borrowing. The Bank of England increases and reduces the base rate to impact inflation. A low interest rate encourages people to spend, risking higher inflation; whereas, a high interest rate encourages people to save and discourages spending, which typically reduces inflation.

The rate of income tax currently set at 20%, which is payable by people earning between £12,571 - £50,270 in England and Wales, and between £14,733 - £25,688 in Scotland. In Scotland, there is an intermediate rate of 21% for those earning between £25,689 - £43,662.

See also Tax-Free Allowance.

A sustained period of downward trend in the price of shares, often triggered by a 20% decline from recent highs.

A fixed income investment that represents a loan made by an investor to a borrower. The borrower is typically corporate or governmental and agrees to repay the loan with interest by a set time in the future to the lender. The issuer of the bond (the borrower) agrees to repay money to the investor (the bond holder) with interest. Failure to repay at the agreed time leads to a default. Bond prices are inversely correlated with interest rates: when interest rates go up bond prices fall, and vice-versa.

A budget is a written plan that helps an individual, organisation or Government to manage their money effectively. A personal budget includes information on income, expenditure, and financial goals, and is an effective way to keep track of and manage personal finances. A budget will highlight what is and isn’t affordable, help inform financial decision-making and create a greater sense of control, which is why creating a budget is a top recommended MoneyFit exercise.

Action: Take a look at the Small Savings Add Up modeller. Create your own personal budget using the free MoneyHelper budgeting tool, or search for Free Budgeting Tools.

An insurance product that will pay out when a house or flat is damaged by an unexpected event such as fire, flooding or storm. The insurance pays for the cost to rebuild the damaged property and is usually taken out in conjunction with contents insurance.

The condition of a financial market in which prices are rising or expected to rise. It is most often used to refer to the stock market, but can be applied to anything that is traded, e.g. shares, bonds, property or foreign currency. If someone is ‘bullish’ about a market, they expect it to rise and will buy now with a view to selling at a profit in the future when the value is higher.

An amount of money invested or borrowed. For example, a ‘capital repayment mortgage’ is a mortgage that is repaid with monthly payments covering both the capital and the interest on the capital borrowed. An ‘interest only’ mortgage pays back just the interest, so at the end of the mortgage term the capital still needs to be paid off.

The increase in value of an asset such as a building, or fine art, when it is sold. A capital gain is only a gain when the item is sold for more than it was purchased.

A tax charged by HMRC on certain capital gains. See Gov.uk for more information.

Any interest payment on savings or investments above a certain amount is taxable. Cash ISAs are savings accounts that pay interest which is exempt from tax. The overall limit for ISA contributions in the 2024/25 tax year is £20,000, and an individual can only open one cash ISA per year. To learn more about cash ISAs, see Money Helper.

For more information about tax payable on the interest on savings visit Gov.uk

Compound interest is the cumulative impact of interest paid on an investment or loan. Compound interest can have a huge impact over time on savings or debt.

Example: Jane saves £100 for 10 years at 5% AER. The £100 will grow to £105 after year 1. In year 2, the interest gained is 5% on £105 and so on. After 10 years, a £100 saving will grow to £164.70, which is a total of 64.7% growth due to the impact of compound interest.

Action: Check out the Savings Interest Modeller to see the impact of compound interest on savings.

Comprehensive insurance refers to motor insurance that covers both accidental damage to the vehicle insured, as well as damage to anyone else’s vehicle involved in the accident. See also Third Party Insurance.

A consolidation loan combines all loans into one loan by paying off multiple loans using one larger loan. Consolidation loans make it easier to manage and keep track of repayments; however, they may not always be better value than paying off existing loans if the interest rate, or term of the loans, means paying back more interest over time.

A way of buying goods or services now and paying later using ‘credit’. Anything bought ‘on credit’ via a credit card, store card, or a store account, is a loan with APR added as soon as it is not paid off within the interest-free period. Credit card and store card payments are typically spread over a long period of time, and their interest rates are often significantly higher than other types of loan. In the UK credit and store cards are a multibillion pound industry, generating huge profits for lenders in interest payments and other charges. For more information on credit cards see Money Helper.

Action: Visit the Loan Interest Modeller modelling tool and calculate the interest payable on a £200 credit card bill over 3 years at 29.9% APR.

An optional insurance that covers the contents of a home, e.g. furniture, TV, computers against theft, fire, flood, or other damage. Contents insurance is paid monthly or annually and can also cover items taken outside of the home, such as a bicycle, or a mobile phone, but only if covered by the policy. The cost of insurance will vary depending on various factors, including the claim history of the person taking out the insurance, the value of the contents covered, and the specific terms of the agreement; e.g. ‘Accidental Damage’ cover is typically more expensive than standard ‘Fire and Theft’ cover. See also Buildings Insurance.

A tax that homeowners and renters pay the local council to cover the cost of council services, such as refuse collection and recycling, and library services. The amount of council tax to be paid varies based on a number of factors, including the value of the property (the Council Tax Band that the property falls into) and the residents in the property, e.g. discounts can be applied for if one of the residents is a full-time student. For more information about council tax see Money Helper.

Consumer Prices Index - an economic index that measures the price of a set basket of items. The CPI is published monthly and indicates whether prices are rising (inflation) or falling (deflation). The CPI is compiled using around 700 separate representative items in the basket, including jam, footwear and second hand cars. The CPI is used to measure the official rate of inflation in the UK. It is published every month and is compared with the same period 12 months previously. When the rate of inflation is 3.2%, it means that the CPI is 3.2% higher than it was for the same period 12 months ago. This is referred to as the annual rate of inflation. See also RPI.

Any form of loan from a bank, retail store or credit card company, to buy something now and pay back later. Some credit offers are interest-free, but most charge interest and fees.

A written contract between a bank, or other lender, and a customer. The creditor allows the customer to borrow money under the terms and conditions set out in the agreement, which includes the interest rate, repayment timescales and consequences for default (failure to repay).

The maximum amount that an individual can borrow at any one time on credit. Once the credit limit has been borrowed up to, no more can be borrowed unless the credit limit is increased. Some people ask the bank/credit card company to reduce their credit limit to help them to borrow less, as borrowing money nearly always costs in interest and other payments.

A record of loans that an individual has taken out in the past along with their payment history, including any missed payments. The information is used by credit reference agencies to advise banks and building societies of an individual's credit score (also referred to as a Credit Rating).

A person or organisation that lends money and is owed money.

See also Debtor.

Also referred to as Credit Rating. Everyone in the UK over the age of 18 is given a credit score to indicate their creditworthiness, i.e. their ability to borrow money based on their likelihood to be able to pay it back. Credit scores are generated by Credit Reference Agencies (CRAs). There are three main CRAs in the UK: Experian, Equifax and TransUnion. There is no one standard scoring system used (e.g. 1-100), but CRAs use terms such as Poor, Fair, Good and Excellent to categorise their scores. All credit scores are calculated automatically using software that takes details from an individual’s credit history, plus other sources of data, and uses it to generate a score. Credit scores are used by lenders to inform their decisions on whether or not to lend and how much to lend. For further information on credit scores (including how to find out your credit score and how to improve your credit score) visit Credit Ladder.

Interesting Fact: Credit scores were developed during the 1950s. The initial idea came from US engineer Bill Fair and mathematician Earl Isaac, as a way to standardise how people are lent money.

An agency that calculates credit scores using credit history and other data, and advises potential lenders on the likely risk involved in lending to an individual. There are three main credit reference agencies in the UK: Experian, Equifax and TransUnion.

A type of insurance cover which pays out a lump sum if the policyholder gets a serious illness. The kinds of illnesses that are covered are usually long-term and very serious conditions, such as a heart attack or stroke, loss of arms or legs, or diseases such as cancer, multiple sclerosis or Parkinson’s disease.

Crowdfunding is a way that individuals, charities and businesses can raise money from the public to support a project, campaign or person. Crowdfunding is most often used by startup companies, or growing businesses, as a way of accessing alternative funds. There are multiple crowdfunding platforms available which enable fundraisers to collect money from a large number of people while also creating a community of followers/advocates.

A digital currency which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. A cryptocurrency wallet is needed to use cryptocurrency. These wallets can be software that is a cloud-based service, or is stored on a computer, or on your mobile device. The wallets are the tool through which encryption keys are stored which confirm identity and link to the cryptocurrency. The collapse of the cryptocurrency exchange FTX in November 2022 has highlighted the high degree of risk surrounding cryptocurrency, with investors who stored their coins on the platform losing a total of around eight billion dollars. They are yet to recover them and may never do so.

Also known as a ‘Final Salary’ or ‘Career Average’ pension, the Defined Benefit pension is a retirement savings plan set up by an employer to provide a regular income in retirement for employees once they reach an agreed retirement age. The amount of the retirement income paid (the benefit) is defined by the rules of the scheme and is paid regardless of investment performance. The DB pension provider will promise to pay a certain amount on a regular basis throughout the length of the individual’s retirement, provided that the employee has made contributions to the plan, deducted from their salary. The amount paid during retirement is defined by factors such as a percentage of the final salary that the employee was paid, or a percentage of the average salary that they received over their career. DB pension schemes are rare as most organisations now offer Defined Contribution schemes for their employees.

See the Pensions section in Learn About Money Resources for more information.

A type of pension set up by an employer or by an individual where the amount contributed into the pension (usually each month) is defined. The money paid into a DC pension pot is usually invested in stocks and shares, and other types of investments such as bonds. The aim is for the pot to grow in value over time as investments grow, but because the value of investments can go down as well as up, the value of a DC pension pot varies from one day to the next. This variation in value means that the benefit, i.e. retirement income, from the pension pot is variable depending on the value of the pot. DC pension schemes are the most common form of pensions that employers set up for their staff, with both the employer and employee making contributions to grow the pension pot over time (see Auto Enrolment).

See the Pensions section in Learn About Money Resources for more information.

Money owed to an individual or organisation, e.g. credit card company, bank, building society or workplace loan provider.

A person or organisation that owes money. See also Creditor.

The Debt Respite Scheme (Breathing Space) will give someone in problem debt the right to legal protections from their creditors.

There are two types of breathing space:

A standard breathing space, available to anyone with problem debt. It gives them legal protections from creditor action for up to 60 days. The protections include pausing most enforcement action and contact from creditors, and freezing most interest and charges on their debts.
A mental health crisis breathing space is only available to someone who is receiving mental health crisis treatment and it has some stronger protections. It lasts as long as the person’s mental health crisis treatment, plus 30 days (no matter how long the crisis treatment lasts).

For more infomation, visit breathing space guidance for creditors.

An amount of money paid towards the full cost of an item, usually paid to secure the item, or to subsidise the total cost of the purchase, e.g. a deposit on a flat or a house. A loan to purchase a property (see Mortgage) is used in addition to the deposit to purchase the property.

See also Loan to Value.

Example: If a property costs £300,000, a 10% deposit would be £30,000, with a remaining mortgage of £270,000 required (plus moving costs such as legal fees) to purchase the property.

A share of profits paid out by a company to each shareholder. If eligible, the shareholders receive an agreed dividend payment for each share that they hold.

An instruction to a bank or building society account to pay an amount of money to a person or organisation on a regular basis such as rent or bills. The value of a direct debit may be fixed (e.g. a monthly subscription) or varied (e.g. a utility bill).

Also referred to as ‘flexible retirement income’ or ‘flexi-access drawdown’.

Drawdown is a way of taking money out of a pension pot to live on in retirement. The first 25% of a pension pot can be drawn down without paying any tax on it, as a tax-free lump sum. Any amounts after the first 25% are taxable as earnings in the tax year that they are taken.

See also Annuity.

For more information on drawdown, visit what is flexible retirement income pension drawdown.

If a person is mentally capable of dealing with their own financial affairs at present, they can agree and sign an enduring power of attorney. A power of attorney gives another person the legal right to manage an individual's affairs. An enduring power of attorney will only come into effect when the individual is no longer capable of looking after their own affairs. It gives authority to the person appointed to act for the person who signed the power of attorney.

The value of something (such as a house) minus the money owing on it.

Example: A flat is worth £200,000, and the outstanding loan owed on the flat is £160,000. The equity in the flat is £40,000.

The process of raising money by releasing the value of the equity in a property.

In the context of insurance (e.g. motor, contents, building, medical) the excess is the amount that the insurance policyholder will have to pay before the insurance company pays towards the claim. Most insurance policies require a minimum excess, with the option to increase the excess which usually reduces the total cost of the insurance.

Example: A car insurance policy has a £400 excess. The policy holder has an accident that is their fault and the repair bill is £2,000. The insurance company will pay £1,600 of the repair bill, but the policyholder will have to pay the excess, i.e. £400 out of their own funds.

An interest rate for savings or loans that is fixed and doesn't move up or down for a set period of time.

Mortgage lenders offer mortgages that have fixed rates of interest for a set period of time, e.g. 2, 3 or 5 years. Fixed rate mortgages make budgeting for mortgage payments easier, as the monthly payment is fixed regardless of what happens to the Bank of England base rate. It’s worth noting that fixed rate mortgages may be higher than tracker mortgages, especially if mortgage rates are falling, and often incur set up fees and early exit fees (i.e. a charge for leaving the fixed rate mortgage term before the fixed period is over).

A way of investing money with other investors on a pooled basis, adding together the invested money from multiple investors. The money in a fund is invested and professionally managed in order to generate returns for its investors. Funds provide individual investors with access to a wider range of investments than they would be able to access as individuals and may reduce the costs of investing due to economies of scale. Funds are managed by fund managers for a management fee on behalf of investors.

An individual’s income before tax, national insurance, pension contributions and any other salary sacrifice payments are taken out.

Her Majesty’s Revenue and Customs, also known as the Inland Revenue. The Government department responsible for collecting tax and paying benefits.

Interesting Fact: The term ‘tax man’ is outdated, in fact females make up 52.4% of the workforce of HMRC.

An Independent Financial Adviser is a qualified adviser who makes recommendations to people on savings, investment and other financial products, such as insurance and life cover. IFAs are independent from the product providers so advise on products from different financial organisations. IFAs seek to understand the investor’s goals, attitude to risk, and income and expenditure, in order to provide the best advice possible based on their experience, market knowledge and professional training. IFAs are professionally qualified consultants and charge fees for their services. They can work as individuals or as part of a company.

See Drawdown

An insurance policy that pays out a monthly income if the policyholder is unable to work due to illness or injury. Income protection usually covers part of the monthly salary and can be paid until return to work.

Tax payable to the Government via HMRC on gross income for employed or self-employed individuals. Income tax is payable at different percentages of income based on total income earned in each tax year. See Tax Bands for more information.

An investment product such as a pension or bond that increases and decreases in value in line with the rate of inflation.

The increase in the cost of goods and services over time.

See CPI and RPI.

Interesting Fact: In 1980, the average cost for a pint of milk was 17p. Today, the average cost for a pint of milk is 66p. That’s a 388% increase in 24 years.

A tax payable to the government on the property, money and possessions of someone who has died (also known as their estate). There are various rules, thresholds and allowances governing inheritance that can be found here.

A financial product that pays the policyholder a sum of money to cover the costs of repair, replacement, medical or other costs, in the event of an unexpected incident such as a motor accident, fire or sickness. See also Buildings Insurance, Contents Insurance and Income Protection.

Interesting Fact: The concept of insurance dates back to around 1750 B.C. with the Code of Hammurabi, which Babylonians carved into a stone monument and several clay tablets. The code describes a form of insurance whereby a ship’s cargo could be pledged in exchange for a loan. Repayment of the loan was contingent on a successful voyage, and the debtor did not have to repay the loan if the ship was lost at sea.

The amount paid to an insurance company either monthly, quarterly or annually, to cover the cost of insurance.

A percentage of an amount borrowed or saved, and the amount by which the original sum borrowed or saved increases. See also AER, APR and Bank of England Base Rate.

A loan used to purchase property where only the interest on the loan is repaid each month, meaning that the loan itself isn’t being paid off. At the end of the mortgage term, the amount owed is the same as when the mortgage began, meaning that the full loan will still need to be repaid. While interest-only mortgages have lower monthly repayments, they do not actually pay off the mortgage. Interest-only mortgages are more expensive in the long term, compared with a Repayment Mortgage, as the loan amount, and therefore the interest due on it, is not being reduced over time. See also Repayment Mortgage.

An Individual Savings Account. HMRC treats interest gained on savings as income, so it is taxable once it goes over an agreed allowance. An ISA is an investment on which no tax is paid on the interest gained, so allows the saver to benefit from interest payments that aren’t taxed. ISAs were introduced by the Government to encourage saving. Every person in the UK has an annual ISA allowance that they can use to save into an ISA. The current allowance is £20,000 a year and the interest made on the ISA is free from tax.

There are 4 types of ISA:

Cash ISA - A savings account that is not invested in stocks, shares or bonds. Interest is paid on the cash saved.

Investment or Stocks and Shares ISA - A savings account where the money saved is invested in stocks and shares, and the interest gained is free from tax. NB: Because the value of stocks and shares can decrease as well as increase, an investment ISA may lose money and does not guarantee growth in value.

Junior ISA - A tax-free savings account for children up to the age of 18. The current maximum allowance for a Junior ISA is £9,000 p.a., and any interest paid on a Junior ISA is tax-free each year. A Junior ISA can be set up for a child from the day they are born and can only be accessed when they reach the age of 18.

Lifetime ISA (LISA) - A tax-free savings account for people aged 18-39 who want to save for a deposit on a property or for retirement. Up to £4,000 can be saved per year, and the government adds in a bonus of 25% each year to the savings. There are various rules and limitations for a LISA. For more information see Gov.uk.

Interesting Fact: A Junior cash ISA of £6,000 saved per year, with a fixed AER of 4%, could be worth a total of £159,559 by the time the child is 18.

The maximum amount of money that an individual can accumulate as pension savings and still benefit from tax relief. If the amount accumulated in pension savings exceeds the lifetime allowance, then tax will have to be paid on those savings that are above the lifetime allowance threshold. For the current lifetime allowance, visit Gov.uk.

A sum of money lent to a borrower that has to be paid back over time. Bank loans, overdrafts, credit cards, mortgages, car finance and store cards are all forms of loans. The majority of loans charge interest on the amount borrowed, although some loans are interest free which means that only the amount borrowed has to be repaid.

Action: Visit the Loan Interest Tool to see the impact of interest on loans.

The percentage of mortgage money needed to purchase a property compared to the cost of the property. Typically, the mortgage required to borrow a property is the value of the property minus the deposit that can be afforded by the buyer, so the higher the deposit, the lower the LTV. Some mortgage lenders charge lower interest rates for mortgages with lower LTVs.

Example: Property cost:
£400,000
Deposit payable: £28,000 (i.e.7%)
Mortgage required: £372,000
LTV = 93%

A loan to buy a property which is then ‘secured’ on the property. Mortgages are provided to borrowers after an application process which requires evidence of income, affordability and credit history. Mortgage providers typically agree to lend an amount that is a multiple of the borrower’s guaranteed monthly salary, taking into consideration deposit size and other irregular income. If the borrower does not repay the loan, the lender has a right to take possession of the property and sell it in order to repay the loan from the proceeds of sale. This is always a last resort, and lenders work with borrowers to help to avoid this outcome.

See also Fixed Rate Mortgage and Variable Rate Mortgage.

Interesting Fact: The word mortgage has its roots in the Latin ‘mortus’ meaning dead, and ‘gage’ meaning pledge, so mortgage means ‘dead pledge’. Historically, when someone borrowed money, they would pledge their property as a guarantee. If they failed to repay the loan, the property would be considered ‘dead’ to them as it would be taken or repossessed by the lender, hence the term dead pledge.

In addition to PAYE, employees and employers pay National Insurance contributions to HMRC. National Insurance is deducted directly from wages, or paid through self-assessment for self-employed workers, and helps to pay for a range of government provided social security benefits, such as job seeker's allowance, the state pension and the NHS. Certain state benefits, such as the state pension, are only paid to those who have made sufficient National Insurance contributions during their working life. For more information on National Insurance, visit Gov.uk.

A unique alphanumeric number that is allocated to you by HMRC. All National Insurance (NI) contributions that you make in your lifetime are allocated to your NI number which determines your eligibility for state benefits, such as the new state pension. If you have lost your NI number you can find it on your payslip, P45 or P60, or use the Government service to find your National Insurance number here.

When the value of a property is worth less than the mortgage owed on it. There is no equity in a property if the mortgage owed on it is greater than the value of the property, hence there is negative equity.

The income received into a bank account after tax, National Insurance and other deductions have been made.

See also Gross Income.

If a driver makes no claims on their insurance policy in an annual period, they are awarded a no claims bonus which will reduce premiums for the following year. The no claims bonus can be built up over time, so a person with four years no claims bonus should pay less for insurance than someone with a year’s no claims bonus. Insurance premium costs are influenced by a number of factors including previous claims and the risk or likelihood of making a future claim. A person with many years of no claims is deemed to be a lower risk to insure. Policyholders can pay an extra premium to ‘protect’ their no claims bonus, which means that if they do make a claim it does not reduce their no claims bonus.

In the context of pensions, the majority of employees are automatically enrolled into a company pension scheme. Employees are entitled to opt out of the pension scheme meaning that neither they nor their employer will pay into their pension. Opting out of a pension is a serious financial decision with significant consequences. Employees are advised to seek financial advice before deciding to opt out of a company pension.

Interesting Fact:A 25 year old employee on £25,000 per year who opts out of a 5% company contribution pension scheme, could miss out on £124,783 in pension contributions from their employer over the course of their employment (assumes 4% annual pay rise and a retirement age of 65).

Open banking is a set of technologies and standards that allow customers to safely and securely share their financial data with third party applications. For example, in a banking app, it is possible to add other bank account information and view multiple bank accounts from different banks in one app. It’s the open banking technology that enables this secure data sharing to work. NB: the owner of the data must give their permission to share the banking data. For the latest news on Open banking, visit the Open Banking Website.

A type of loan (and often an expensive type) that enables a bank account holder to withdraw more than is in their account and go ‘overdrawn’. Overdrafts always have to be repaid with interest. Major changes affecting the cost of overdrafts were introduced in April 2020. Banks used to charge higher fees for unauthorised overdrafts, but since April 2020 they are not allowed to do this. Interest on all overdrafts is charged at a single annual interest rate (APR), and often range from 19% to 40% or more. Using an unarranged or unauthorised overdraft can affect an individual’s credit score.

Pay As You Earn is the collection of income tax and National Insurance from an individual’s salary before they have been paid. The taxes are paid directly to HMRC via the employer.

A savings plan that employees and employers contribute to over the course of employment that grows over time to provide an income in retirement. A pension can also be set up by an individual if they are a Director, self-employed or not employed. This is known as a Self Invested Personal Pension (SIPP). The money saved into a pension pot is invested and hopefully (but not always) grows over time.

See Defined Benefit Pension and Defined Contribution Pension.

See Insurance Premium.

See No Claims Bonus.

The process of changing mortgage provider or mortgage deal, or borrowing additional money from a bank or building society while staying in the same property. For example, an individual who has a mortgage on a three year fixed rate of 4%, at the end of the three year term may choose to remortgage with a different provider that is offering a lower interest rate.

A mortgage that pays off both the capital and the interest at the same time. If all the monthly repayments are made during the whole term of the mortgage, the mortgage debt will be fully repaid by the end of the term.

See also Interest-Only Mortgage.

Retail Price Index. A way of measuring the changing prices of everyday items over time. RPI is calculated by pricing up a representative basket of current goods and services and then dividing the figure by the number of items. Unlike CPI, RPI also includes housing costs, such as mortgage and rents. This means that RPI tends to overstate inflation compared with CPI. Although RPI is still compiled monthly by the Office for National Statistics (ONS), it is no longer classified as a ‘national statistic’. In a 2018 press release, the ONS said: “Our position on the RPI is clear: we do not think it is a good measure of inflation and discourage its use.”

See also CPI.

A savings scheme where employees can save a monthly amount of between £5 and £500 for a period of three or five years, and at the end of the period, buy shares in the company with their savings. Employees can save up to a maximum of £500 a month under the scheme and at the end of the savings contract (three or five years) can use the savings to buy shares in the company. The price of the shares (exercise price) may be discounted by the employer, so that employees benefit from the difference in the discounted price and the actual share value when they purchase the shares at the end of the savings period. The maximum discount that an employer can offer is 20%. There are tax advantages for a SAYE scheme: the interest on the savings and any bonus at the end of the scheme is tax-free, and no Income Tax or National Insurance is paid on the difference between what the shares cost and what they are worth.

Interesting Fact: Over 14,000 companies in the UK offer a Sharesave scheme.

See Save as You Earn.

A system for HMRC to collect Income Tax or National Insurance contributions. Unlike PAYE, which is tax paid automatically through employment, self-assessment requires the individual to complete a tax return, in which they record their earnings and any other income that is taxable. After completing a tax return, HMRC calculates the tax that the individual is due to pay. There are various rules governing who needs to register for self-assessment, and it is possible that an employee has to complete a self-assessment tax return even if they pay tax and national insurance via PAYE. For the rules governing self-assessment, visit Self-Assessment tax return.

A Self-Invested Personal Pension is a type of plan that allows you, or your appointed fund manager, to make choices from a wider range of investments than other personal pension schemes offer. With a SIPP you can invest in the shares of any company listed on a stock exchange.

The basic interest rate that a mortgage lender uses and applies to mortgages that are not on a fixed rate or tracker mortgage. Standard Variable Rate is invariably higher than fixed rates of variable rate and therefore more expensive than other deals that the mortgage lender offers. The rate can also vary at any time, so an SVR is both expensive and unpredictable for budgeting purposes.

Stamp duty is a tax on the sale of certain types of transactions. Examples of sales subject to stamp duty include: the buying of shares, patent rights, and properties. For the current stamp duty rates on property transactions, see residential property rates.

The retirement pension that the Government pays to people who have paid enough National Insurance contributions. The state pension is in addition to any employee or private pension that has been paid into and can only be received at retirement age. See State Pension Age for information on your retirement age.

The Government's state pension forecast tool enables anyone to check on how much state pension they could get, when they could receive it and how to increase it if possible. Visit Check State Pension to find out more.

See Share.

A charge on income, earnings or other financial transactions, that is made by the Government and used to pay for public services, including the NHS, roads, schools and much more. There are many different types of tax, including Income Tax, Inheritance Tax, Stamp Duty (a tax on a property transaction), VAT (Value Added Tax) and corporation tax (paid by businesses).

Also known as Personal Allowance. The amount a person can earn each year without having to pay tax. Any earnings that go above the tax-free allowance in a tax year are taxed at the current tax rates. For the current tax-free allowance and tax rate bands, see Gov.uk. Anyone earning over £125,140 does not receive a tax-free allowance.

HMRC calculates the tax-free allowance for every tax payer based on factors such as total earnings and gift aid donations. The total allowances are converted into a code number which is used to work out how much tax should be taken from the income. For more information on what the letters and numbers in a tax code mean, visit how to update your tax code.

You can check your tax code here: check income tax current year.

How much tax a person pays on their income depends on their total income in a tax year. For anyone earning under £125,140, the first £12,570 of earnings is called a personal allowance – meaning no tax is paid on it. After that, the tax you pay varies depending on if you live in England and Wales, or Scotland.

For income tax bands for those living in England and Wales, see income tax rates.

For income tax bands for those living in Scotland, see scottish income tax.

The tax year runs from the 6th of April to the 5th of April the following year. Taxes due are worked out based on this period, rather than the calendar year.

An electronic (or paper) form that everyone who is required to complete self-assessment has to fill in and submit to HMRC. Income and gains for the year are declared on the form and certain allowances are claimed. HMRC calculates the tax due based on the information provided on the tax return. See Self-Assessment.

The amount of money earned over and above the tax-free allowance, that tax has to be paid on.

The number of months or years over which a loan has to be repaid.

Car or bike insurance that only covers any damage to another person’s vehicle, or fire and theft of your car.

A mortgage that has a rate of interest that is linked to a particular rate, set independently from the lender. The most common form of tracker mortgage is a Base Rate Tracker that tracks the Bank of England Base Rate and is usually a set percentage above the base rate, e.g. base rate + 0.99%. The level of interest paid on the mortgage moves up and down as the rate moves up or down.

A mortgage that has an interest rate that varies (rather than being fixed). There are three main types of variable rate mortgage. A tracker mortgage that varies with the Bank of England Base Rate, a discount variable mortgage which is a discount that the lender offers on their standard variable rate, and a standard variable rate mortgage.

Value Added Tax. A tax added onto many goods and services. The current standard rate for most products is 20%, although it does vary, and some items are exempt from VAT. VAT is paid by the buyer and is collected by the seller, who then hands over the tax to the government.

The excess on an insurance policy that the policy holder can voluntarily choose to pay.

See Excess.

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