Glossary

50 everyday financial terms, in plain English. Start typing to filter.

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A

Active investing: An approach where a fund manager, or an individual investor, actively picks investments aiming to outperform a market index, typically at a higher cost than passive options.

Amortisation: The process of gradually paying off a loan through regular instalments that cover both interest and a portion of the original amount borrowed.

Annual Equivalent Rate (AER): The equivalent yearly interest rate on a savings account once compounding is taken into account, used to compare savings products.

Annual Percentage Rate (APR): A standardised measure of the total cost of borrowing over a year, including interest and most fees, used to compare loans and credit cards on a like-for-like basis.

B

Bear market: A period in which the prices of investments fall significantly over a sustained period, typically associated with pessimism about the economy.

Bull market: A period in which the prices of investments rise significantly over a sustained period, typically associated with optimism about the economy.

C

Capital Gains Tax (CGT): A tax on the profit made when you sell or dispose of an asset, such as shares or a second property, that has increased in value.

Compound interest: Interest calculated not only on the original amount saved or borrowed, but also on the interest that has already accumulated, so growth or debt builds on itself over time.

Credit score: A number used by lenders to estimate how likely you are to repay borrowing reliably, based on your credit history.

Credit utilisation: The proportion of your available credit, such as a credit card limit, that you're currently using. Keeping this lower is generally viewed favourably by lenders.

Critical illness cover: Insurance that pays a single lump sum if you're diagnosed with one of a specific list of serious illnesses defined in the policy.

D

Debt-to-income ratio: A comparison of how much you owe each month against how much you earn, used as a rough gauge of how stretched your finances are.

Defined benefit pension: A pension that promises a specific income in retirement, usually based on salary and years of service, with the employer carrying the investment risk.

Defined contribution pension: A pension where you and usually your employer pay money in, it's invested, and the eventual pot depends on contributions and investment performance.

Direct debit: An instruction allowing an organisation to take a, sometimes variable, payment from your account automatically on agreed dates.

Diversification: Spreading money across different investments, sectors or regions so that poor performance in one area doesn't sink your entire portfolio.

Dividend: A portion of a company's profit paid out to its shareholders, usually on a regular schedule.

E

Emergency fund: Money set aside specifically to cover unexpected costs or a loss of income, kept somewhere accessible rather than invested or locked away.

ETF (exchange-traded fund): A fund that holds a basket of investments, such as shares in many companies, and trades on a stock exchange like an individual share.

Excess (insurance): The amount you agree to pay yourself toward a claim before the insurer covers the rest.

F

FCA (Financial Conduct Authority): The UK regulator responsible for overseeing financial services firms and protecting consumers in financial markets.

Fixed-rate mortgage: A mortgage where the interest rate is locked for a set period, so repayments stay the same even if wider rates move.

FSCS protection: Compensation from the Financial Services Compensation Scheme that can cover eligible deposits or investments, up to a set limit per institution, if an authorised firm fails.

G

Gross income: Your total earnings before tax, National Insurance and other deductions are taken out.

H

Hard search (credit check): A credit check, usually triggered by a credit application, that leaves a visible mark on your credit file and can have a small, temporary effect on your score.

I

Income protection insurance: Insurance that pays a regular, ongoing income if you're unable to work due to illness or injury, usually after a waiting period.

Index fund: A fund built to track the performance of a particular market index, rather than having a manager pick individual investments.

Individual Savings Account (ISA): A tax wrapper that can hold cash or investments, within which interest, dividends and growth are generally free of Income Tax and Capital Gains Tax, up to set annual limits.

Inflation: The rate at which prices rise over time, which erodes the purchasing power of money that isn't growing at least as fast.

L

Liquidity: How quickly and easily an asset can be turned into cash without losing significant value.

Loan-to-value (LTV): The size of a mortgage loan expressed as a percentage of the property's value; a smaller deposit means a higher LTV.

N

National Insurance: A UK system of contributions, deducted from pay or self-employment profits, that builds entitlement to certain state benefits and the State Pension.

Net income: What's left of your earnings after tax, National Insurance and other deductions — sometimes called take-home pay.

Net worth: The value of everything you own, minus everything you owe.

O

Overdraft: An agreed, or unagreed, facility allowing you to spend more than the balance in your current account, usually at a cost.

P

Passive investing: An approach that aims to match the performance of a market index rather than beat it, typically through funds with lower ongoing charges than actively managed alternatives.

Pension auto-enrolment: A UK requirement for employers to automatically enrol eligible staff into a workplace pension, unless the employee actively opts out.

Personal allowance: The amount of income you can receive in a tax year before you start paying Income Tax on it.

Premium (insurance): The amount you pay, usually monthly or annually, to keep an insurance policy active.

R

Real return: The growth on an investment or saving once inflation has been subtracted, showing the actual increase in purchasing power.

Risk tolerance: How much fluctuation in value someone is comfortable accepting in pursuit of higher potential returns — this differs from person to person.

S

Self-assessment: The system HMRC uses for people to report and pay tax on income that isn't automatically taxed through PAYE, such as self-employment or rental income.

Sinking fund: Money set aside gradually for a specific, planned future cost, such as a car replacement or annual insurance bill, rather than for general emergencies.

Soft search (credit check): A credit check, such as checking your own score or some lender eligibility checks, that doesn't affect your credit score and isn't visible to other lenders.

Stamp Duty Land Tax: A tax paid when buying property or land over a certain price in England and Northern Ireland. Scotland and Wales have their own equivalents.

Standing order: A fixed, regular payment you instruct your bank to make, for the same amount each time, until you cancel or change it.

State Pension: A regular payment from the government in retirement, based on National Insurance contributions, separate from any workplace or personal pension.

T

Tax code: A short code used by HMRC to tell an employer or pension provider how much of your income should be tax-free before the rest is taxed through PAYE.

U

Unique Taxpayer Reference (UTR): A 10-digit number HMRC issues to identify you for self-assessment. You'll need it to register and to file a return.

V

Variable-rate mortgage: A mortgage where the interest rate can move up or down over time, often in line with a lender's standard rate or the Bank of England base rate.