UK Finance Glossary 2026/27

The maximum total pension contributions — from you and your employer combined — that can receive tax relief in a single tax year. For 2026/27, this is £60,000 (or 100% of your earnings, whichever is lower). Exceeding the annual allowance triggers a tax charge on the excess at your marginal rate. Tapered annual allowance reduces this for high earners above £260,000 adjusted income.

The true interest rate on a savings account, expressed as if interest were paid and compounded once per year. AER allows fair comparison between accounts that compound at different frequencies (monthly, quarterly, annually). An account paying 4% AER monthly compounds more frequently than one paying 4% AER annually — but the advertised AER already accounts for this. When comparing savings accounts, always compare AER, not the gross or monthly rate.

The true annual cost of borrowing, expressed as a percentage. APR includes both the interest rate and any mandatory fees (arrangement fees, annual charges) spread over the loan term. All UK lenders must quote APR by law, making it the correct figure to compare across loans, mortgages and credit cards. A loan with a lower stated interest rate but high arrangement fee may have a higher APR than a competitor with a higher stated rate but no fees. Representative APR is what 51%+ of accepted applicants receive — your personal APR may differ based on your credit profile.

The legal requirement for employers to automatically enrol eligible workers into a workplace pension scheme. Employees aged 22–66 earning above £10,000/year must be automatically enrolled. Minimum contributions for 2026/27: employee contributes at least 5% of qualifying earnings (£6,240–£50,270), employer contributes at least 3%. Workers can opt out but lose the employer contribution — generally a poor financial decision. Qualifying earnings includes salary, wages, commissions, bonuses and overtime.

The standard income tax rate paid by most UK employees. For 2026/27, basic rate tax of 20% applies to taxable income between £12,571 and £50,270. Taxable income is your gross income minus your Personal Allowance and any pension contributions. Around 80% of UK taxpayers pay only basic rate tax. Basic rate taxpayers also receive a £1,000 Personal Savings Allowance and pay 8.75% on dividends above the £500 dividend allowance.

Tax charged on the profit when you sell or dispose of an asset that has increased in value. Assets include shares, investment funds, buy-to-let property, second homes, business assets, and some personal possessions worth over £6,000. For 2026/27, the CGT annual exempt amount is £3,000 — gains below this are tax-free. Gains above £3,000 are taxed at 18% (basic rate taxpayer) or 24% (higher/additional rate) for investments and property. Assets inside an ISA or pension are exempt. You must report and pay CGT via Self Assessment if you exceed the exempt amount.

Interest earned on both the original principal and on previously earned interest. Also called 'interest on interest'. Compound interest is the mechanism behind long-term wealth building — as your pot grows, each period's interest is calculated on a larger base. A £10,000 investment at 7% compound annual growth doubles in approximately 10 years (Rule of 72: 72 ÷ 7% ≈ 10.3 years). Most savings accounts, ISAs and pensions compound their returns. Compare: simple interest, which only accrues on the original principal.

A local tax charged by UK councils on residential properties to fund local services (refuse collection, social care, roads). Properties are assigned to a band (A–H in England, A–I in Wales) based on estimated 1991 property values. Annual bills vary significantly by council — Band D averages around £2,000–£2,500/year across England in 2026/27 but can range from £1,200 to over £3,000. Single-person households receive a 25% discount. Students are generally exempt. Check your council's website for exact rates.

A distribution of a company's profits to its shareholders, typically paid quarterly or twice a year. If you own shares in a company that pays dividends, you receive a cash payment proportional to your shareholding — without having to sell any shares. Dividends are expressed as a dividend per share (e.g. 20p per share) or as a dividend yield (annual dividend ÷ share price × 100). In the UK, dividends above the £500 dividend allowance are taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate). Dividends inside an ISA or pension are tax-free.

The amount of dividend income you can receive outside an ISA or pension each tax year before paying dividend tax. For 2026/27, this is £500. Dividends above this are taxed at your dividend rate. The allowance has been cut from £2,000 (2017–2023) to £1,000 (2023/24) and £500 (from 2024/25). Dividends inside an ISA or pension are completely exempt — the allowance only applies to GIA dividends. Reinvested dividends (DRIP) in a GIA still count toward the allowance in the year received.

A penalty charged by a mortgage lender if you overpay beyond your allowed limit, switch to a new deal, or repay your mortgage in full during a fixed or discounted rate period. ERCs are usually expressed as a percentage of the outstanding balance and decrease each year you remain in the deal — for example, 5% in year 1, 4% in year 2, down to 1% in year 5. Always check ERCs before overpaying or remortgaging. If the ERC cost exceeds the saving from switching, it may not be worth it until the ERC drops.

Your total salary or wages before any deductions are applied — income tax, National Insurance, pension contributions, student loan repayments, or any other deductions. Gross pay is the headline figure in your employment contract or job advert. Most financial calculations start from gross pay — tax is then calculated based on your gross income minus your Personal Allowance and any salary sacrifice or pension deductions. See also: net pay (what you actually receive).

A government-backed tax wrapper that shields savings and investments from income tax, capital gains tax and dividend tax. There are four main types: Cash ISA (interest-bearing savings, no risk to capital), Stocks and Shares ISA (investments in equities, bonds, funds), Innovative Finance ISA (peer-to-peer lending), and Lifetime ISA (for first-time buyers and retirement, 25% government bonus on up to £4,000/year). The annual ISA allowance for 2026/27 is £20,000 across all ISA types combined. Unused allowance cannot be carried forward to the next tax year.

The main tax on earnings from employment, self-employment, pension income, rental income and some benefits. For 2026/27: the Personal Allowance is £12,570 (no tax). The basic rate is 20% (£12,571–£50,270). The higher rate is 40% (£50,271–£125,140). The additional rate is 45% (above £125,140). The Personal Allowance is tapered by £1 for every £2 of income above £100,000 — creating a 60% effective marginal rate between £100,000 and £125,140. Scotland has different income tax rates, which apply in place of UK rates for Scottish taxpayers.

The ratio of your mortgage loan to the property's value, expressed as a percentage. LTV = (loan amount ÷ property value) × 100. A 90% LTV mortgage means you are borrowing 90% of the property value and have a 10% deposit. Lower LTV = more equity = lower risk to the lender = better mortgage rates offered. Rate tiers typically improve at 60%, 70%, 75%, 80%, 85%, and 90% LTV. First-time buyers with a 5% deposit (95% LTV) get the least favourable rates; those with 25%+ deposit (75% LTV or below) access the best rates.

The rate of income tax applied to each additional £1 of income at a given level. Not to be confused with your average or effective tax rate (the proportion of your total income paid as tax). For most UK earners in 2026/27, the marginal rate is 20% (basic rate). For income between £50,271 and £100,000, the marginal rate is 40%. Between £100,000 and £125,140, the effective marginal rate is 60% due to the Personal Allowance taper — for every £2 earned, you pay 40% tax plus lose £1 of Personal Allowance (worth another 40p in tax). Above £125,140, the marginal rate reverts to 45%.

A secured loan used to purchase property, where the property itself serves as collateral. If you cannot repay, the lender can repossess and sell the property. UK mortgage terms typically run 25–35 years. The most common types are: repayment mortgage (monthly payments reduce both interest and capital — you own the property outright at the end), and interest-only mortgage (monthly payments cover only interest — capital remains outstanding at the end, requiring a repayment strategy). Fixed-rate mortgages lock in the interest rate for a set period (2, 5, 10 years). Variable-rate mortgages (tracker, discounted, SVR) can change with the Bank of England base rate.

A contribution made by employees, employers and the self-employed to fund state benefits including the NHS, State Pension and Universal Credit. For employees (Class 1) in 2026/27: 8% on earnings between £12,570 and £50,270; 2% above £50,270. Employers also pay 15% on earnings above £5,000 per employee. Self-employed people pay Class 4 NI at 6% on profits between £12,570 and £50,270, and 2% above £50,270 (rates changed April 2024). Class 2 NI was abolished from April 2024. NI contributions count toward your State Pension entitlement — 35 qualifying years gives the full new State Pension (£11,502/year in 2026/27).

Your actual monthly or annual income after all deductions have been taken from your gross pay: income tax, National Insurance, pension contributions, student loan repayments, and any other salary deductions. Net pay is what actually lands in your bank account. Common misconception: many people assume their entire salary above the basic rate threshold is taxed at 40% — in reality, only the income above the threshold attracts the higher rate; income below it continues to attract the relevant lower rate (or nil if within the Personal Allowance).

A certificate issued by your employer at the end of each tax year (5 April) confirming your total pay and tax deducted that year. Needed for: completing a Self Assessment tax return; claiming tax rebates; applying for mortgages (proof of earnings); child benefit claims. Employers must provide P60s by 31 May. If you have multiple jobs, you receive a P60 from each employer. If you leave a job mid-year, you receive a P45 instead — which shows earnings and tax to the date you left.

The HMRC system for collecting income tax and National Insurance directly from an employee's wages before they are paid. Under PAYE, your employer acts as a tax collector — deducting the correct amount each pay period and paying it to HMRC on your behalf. Most employed people do not need to file a Self Assessment return because PAYE handles their tax automatically. Tax codes (e.g. 1257L) are used to adjust PAYE deductions for untaxed income, benefits in kind, or unpaid tax from previous years. If your tax code changes, your take-home pay changes accordingly.

The amount of income you can earn each tax year without paying income tax. For 2026/27, the standard Personal Allowance is £12,570. You pay no income tax on income up to this amount. The Personal Allowance is the same for everyone regardless of age (the separate age-related allowances were abolished in 2016). Important taper: for every £2 of income above £100,000, you lose £1 of Personal Allowance. At £125,140, the Personal Allowance is completely withdrawn, creating an effective 60% marginal tax rate between £100,000 and £125,140. Pension contributions reduce your adjusted net income and can restore the full allowance.

The amount of savings interest you can earn tax-free each year outside a Cash ISA. For 2026/27: basic rate taxpayers can earn £1,000 interest without paying tax; higher rate taxpayers, £500; additional rate taxpayers, £0. Interest above the PSA is taxed at your marginal income tax rate. Cash ISA interest is entirely exempt from tax and does not count toward the PSA. The PSA is applied automatically by HMRC — you do not need to claim it, but you must report interest above your PSA via Self Assessment if you normally file one.

The percentage of your retirement portfolio you can withdraw each year without running out of money over a long retirement. The most widely used rule is 4% (the '4% rule' or 'Trinity Study rule') — based on historical data suggesting a diversified portfolio at 4% withdrawal survives 30+ years. This means your target retirement pot = annual spending ÷ 0.04 = 25× your annual spending. Some planners use 3–3.5% for very early retirements (35–40 year horizon) or lower-return environments. 5% is sometimes used for later retirement with a shorter expected drawdown period. UK FIRE planning typically uses 3.5–4%, with State Pension from 66 reducing the withdrawal rate needed from that age.

An arrangement where you voluntarily give up a portion of your gross salary, with your employer contributing an equivalent amount to your pension (or another benefit). This reduces your taxable income AND your NI-able earnings — meaning you save both income tax and employee National Insurance on the sacrificed amount. For a basic rate taxpayer, every £100 sacrificed costs only £72 in take-home pay (saving £20 income tax + £8 NI). For a higher rate taxpayer, it costs £52 (saving £40 + £8 NI). Many employers also pass on their own NI saving (15% above £5,000). Salary sacrifice can also help restore the Personal Allowance for earnings between £100,000 and £125,140.

A type of personal pension that allows you to choose your own investments from a wider range than most workplace schemes — including individual shares, ETFs, investment trusts, gilts and many funds. SIPPs offer the same tax advantages as all pensions: contributions attract 20–45% tax relief, investments grow free of income tax and CGT, and 25% of the pot can be taken tax-free from age 55 (rising to 57 in April 2028). Suitable for the self-employed, those who want to consolidate multiple workplace pensions, or investors wanting to manage their own allocation. Key risk: the investment decisions are yours — if you invest poorly, you may retire with less than expected.

A tax on property purchases in England and Northern Ireland (Scotland has Land and Buildings Transaction Tax; Wales has Land Transaction Tax). For residential properties from April 2025 in 2026/27: 0% up to £250,000; 5% from £250,001 to £925,000; 10% from £925,001 to £1.5m; 12% above £1.5m. First-time buyer relief (2026/27): 0% on the first £300,000; 5% from £300,001 to £500,000 (no relief above £500,000). Second home buyers and buy-to-let landlords pay a 3% surcharge on all bands. SDLT is due within 14 days of completion. Scotland and Wales have their own equivalent taxes with different thresholds.

A regular government payment to people who have reached State Pension age and have sufficient qualifying NI years. The full new State Pension for 2026/27 is £11,502/year (£221.20/week). State Pension age is currently 66, rising to 67 between 2026 and 2028. You need 35 qualifying NI years for the full amount; 10 years for any State Pension at all. The State Pension is paid on top of any private or workplace pension. It increases each year by the 'triple lock' — the higher of inflation (CPI), average earnings growth, or 2.5%.

A code assigned by HMRC to tell your employer how much income tax to deduct from your pay. The most common tax code for 2026/27 is 1257L — the number 1257 represents £12,570 (your Personal Allowance) divided by 10, and the L means the standard Personal Allowance applies. Other codes: BR (Basic Rate — no personal allowance, all income taxed at 20%), D0 (all income at 40%), D1 (all at 45%), K codes (you owe unpaid tax from previous years, so more is deducted). W1 or M1 after the number means the code is emergency non-cumulative. If your code is wrong, you may overpay or underpay tax — check it matches your circumstances.

Government top-up added to pension contributions equal to the income tax you would have paid on that income. Basic rate taxpayers get 20% relief: contributing £80 to a pension becomes £100 in your pot (the government adds £20). Higher rate taxpayers get 40% total relief: contributing £60 net becomes £100 in the pot. Additional rate taxpayers get 45%. Relief at source: the pension provider claims 20% from HMRC and adds it to your pot. Higher/additional rate relief must be claimed via Self Assessment. Salary sacrifice: your employer reduces your gross pay and pays the pension directly — NI savings also apply, making it the most tax-efficient contribution method.