Income Tax is tax you pay on income from sources such as employment or a pension. Most people have a tax-free personal allowance for income – this is currently £12,500. Basic-rate tax is then charged at 20% on income between £12,501 and £50,000. Higher-rate tax is charged at 40% on income between £50,001 and £150,000, and additional-rate tax is charged at 45% on income over £150,000.

In Scotland there are five different bands for Income Tax ranging from 19% to 46%.

Capital Gains Tax is a tax charged on profit when you sell or ‘dispose of’ an asset that has increased in value. Disposing of an asset can include giving it away as a gift or swapping it for something else.

Everybody receives a tax-free allowance of £12,000 for Capital Gains Tax – any profits under this amount will not be taxed. The rate of Capital Gains Tax is either 10% or 20%, depending on whether you pay basic-rate or higher-rate Income Tax. However, these amounts increase to 18% and 28% for capital gains made on residential property.

An Individual Savings Account (ISA) is the most common and simplest account for tax-free saving and investing. Money held in ISAs is free from Income Tax and Capital Gains Tax. However, to offset these generous rules there is a limit to how much you can pay into an ISA each tax year. The annual ISA allowance is currently £20,000.

Everybody receives an annual allowance for dividend income received from shares held outside an ISA. The dividend allowance is currently £2,000. Any dividend income above this amount will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.

Venture Capital Trusts (VCTs) are ‘pooled’ funds that invest in smaller and younger companies. VCTs are high risk as these companies can struggle and fail, and their shares can also be difficult to sell. To offset these risks, VCTs offer tax benefits. These include a 30% Income Tax rebate on investments up to £200,000 each tax year, but only if you have paid the amount of tax being rebated and stay invested in the VCT for a minimum of five years.

The Enterprise Investment Scheme (EIS) allows direct investment into small, unquoted companies (those that are not listed on the London Stock Exchange). Similarly to VCTs, EIS offers a 30% Income Tax rebate on investments up to £1 million. However, you must have paid the amount of tax being rebated and hold the shares for at least three years.

The Seed Enterprise Investment Scheme (SEIS) is similar to EIS, and encourages direct investment into start-ups. However, the tax benefits are more generous than EIS as these companies are younger and may not have fully developed a product or service yet. You receive a 50% Income Tax rebate on investments up to £100,000 as long as you have paid the amount of tax being rebated and stay invested for at least three years.

Inheritance Tax (IHT) is a tax charge (usually 40%) on any part of your estate that exceeds your personal allowance (also called the nil rate band). This is currently £325,000 per person. Your estate is a combination of your:

- Property

- Savings

- Investments

- Other assets, wherever in the world they are held

- Any gifts you give away in the seven years leading up to your death

Inheritance Tax is usually charged at 40%. The charge drops to 36% if you give at least 10% of your estate away to charity when you die.

Estate planning involves planning how to pass on your assets to the next generation in the most effective way. A significant part of this will usually be minimising Inheritance Tax. This could be achieved by using allowances, making gifts, setting up life insurance or simply spending your money.

The nil rate band is your personal allowance that is free from Inheritance Tax. It is currently £325,000 per person. Any unused allowance can be transferred between married couples and civil partners when one spouse dies.

The residence nil rate band is an allowance for passing on the family home. It is currently £150,000 (increasing to £175,000 by April 2020) and can be transferred between spouses and civil partners.

The allowance is tapered down for people with larger estates, reducing by £1 for every £2 that the estate is valued at over £2 million.

The residence nil rate band can only be used when passing on a residence to direct descendants and applies only to your home, not a buy-to-let property.

This is often the cheapest and simplest form of estate planning. You can make outright gifts that are tax-free, or gifts that are considered potentially exempt. You can also make gifts in trusts which will allow you to keep control over your money as you can choose who receives the gift and when.

Deciding how to make financial gifts and how much you can afford to give can be difficult, so you could consider speaking to a financial adviser who can point you in the right direction.

Gifts that are not immediately tax-free are considered potentially exempt. If you die within seven years of making a potentially exempt gift, it counts as part of your estate and may be subject to Inheritance Tax.

If you made a potentially exempt gift that was bigger than the nil rate band, you could benefit from taper relief (also known as the seven year rule). This gradually reduces the amount of Inheritance Tax that is chargeable over the seven years after you made the gift.

- The annual gifting allowance is £3,000 and you can split this between as many people as you like. If you don’t use it, you can carry it forward one year for a maximum allowance of £6,000

- Gifts to your husband, wife or civil partner are tax-free if their permanent home is in the UK

You can make as many small gifts of £250 as you want, but one person can receive no more than £250

- Regular gifts from excess income are tax-free, as long as they won’t affect your normal lifestyle

- Gifts to charities, museums, universities, sports clubs and some political parties are tax-free

The rules can be complex so it is worth speaking to a financial planner if you have questions about making gifts.

Any money left in your pension when you die does not form part of your estate, meaning it isn’t taken into account when your Inheritance Tax bill is calculated. Taking income from other sources in your retirement means you might be able to reduce the size of your estate (and future Inheritance Tax bill) while passing on your pension to your beneficiaries tax-free.

A trust is similar to a treasure chest. It is a locked box holding money or other contents for somebody else’s benefit. A trust is set up by a settlor and is managed by the trustees, who distribute the contents of the trust to beneficiaries.

A defined benefit pension (also known as a final salary pension) is usually set up by your employer. It guarantees you a regular income in retirement, usually based on your salary and the number of years you have worked. The level of income may also increase in line with inflation.

On the other hand, defined contribution pensions do not offer you a guaranteed level of income. The amount of money you will have in retirement depends on how much you or your employer has contributed and how well your pension investments have performed.

Usually you can pay as much as you earn each year into your pension, up to a maximum of £40,000. This is your annual allowance.

The allowance reduces for people with more than £150,000 of annual income, down to a minimum of £10,000. This is known as the tapered annual allowance.

For people with income of more than £150,000, the £40,000 annual allowance is cut down. It is reduced by £1 for every £2 of income earned above £150,000 down to a minimum of £10,000 for those with an income of more than £210,000.

Pension carry forward lets you pay more than your annual allowance into your pension by ‘carrying forward’ unused allowance from the previous three tax years (as long as you have sufficient earnings). You still will receive tax relief on the payments and it can be useful for those affected by the tapered allowance.

The lifetime allowance is the amount you can hold in your pension over your lifetime. The allowance is currently at £1.055 million. Your pension is assessed against the allowance when you take benefits, die or reach age 75. Any excess is taxed at 25% on top of Income Tax if taken as income, or 55% if taken as a lump sum.

Investments in pensions grow free from Income Tax and Capital Gains Tax. Pension contributions are paid from gross (pre-tax) income. Where tax has already been paid on a pension contribution it is refunded. The taxman will automatically top up pension contributions up to your annual allowance by 20% to cover basic rate tax. Higher or additional-rate tax payers can then claim back any higher or additional-rate tax that they have paid on contributions through their tax return.

You can normally take up to 25% of your pension tax-free – either as a single lump sum or as a series of smaller withdrawals. You can also take a regular income from your pension by making lump sum withdrawals, buying an annuity or setting up income drawdown.

A defined benefit (final salary) pension will usually stop paying an income when you or, if your pension income passes onto a dependant, your dependant dies. A defined contribution pension can be passed on to your beneficiaries. If you die before the age of 75 the pension will be passed on tax-free. If you die after 75, your beneficiaries will pay their usual rate of Income Tax on any money taken from the pension.

Pensions do not usually form part of your estate so they are not charged with Inheritance Tax when you die. However, any income or lump sum death benefits paid from your pension may form part of your estate and therefore be liable to tax.