Investments & Taxation
Last Updated: 6 Apr 24 14 min read
1. Key Points
4. Top slicing relief calculation
5. When part of the gain falls into additional rate
6. Two or more chargeable event gains the same tax year
7. When top slicing relief doesn't apply
9. Example of top slicing relief for an onshore bond
10. Example of top slicing relief for an offshore bond
11. Example of top slicing relief for an onshore bond with additional rate tax due
In our articles UK Investment Bonds: taxation facts and Taxation of Offshore Policies article we explained that chargeable event gains are treated as forming the highest part of total income in a top slicing relief calculation. The relief can assist in reducing the rate of tax charged on bond gains by applying a spreading mechanism. Please see also Top Slicing Relief planning.
With regard to basic/higher rate taxpayers, the implications of the Scottish Rate of Income Tax (SRIT) need to be addressed for Scottish taxpayers. SRIT applies to non-savings and non-dividend income with the personal allowance and thresholds and taxes on savings and dividends remaining a UK ‘reserved’ matter. The higher rate threshold for Scottish taxpayers is below the threshold in the rest of the UK. Nevertheless, given that the Scottish Parliament can only set the rates and the limits for non-savings and non-dividend income, then for savings, dividends and capital gains, it is necessary to ignore the Scottish threshold and refer to the UK limit instead.
Top slicing relief is generally available where the taxpayer would be liable to tax at a lower rate were it not for the inclusion of the chargeable event gain in their income for the year. When the chargeable event gain does not move a taxpayer into a higher tax rate, there may be still be some top slicing relief available due to the effect of the personal savings allowance nil rate and the starting rate for savings.
The starting rate for savings and the PSA nil rate should be taken into account when calculating top slicing relief, where applicable.
In certain circumstances the starting rate for savings gives rise to a 0% rate of income tax for savings income. In 2024/25, the starting rate for savings band is £5,000. The 0% rate applies to as much of the first £5,000 of taxable income (after deducting the personal allowance and blind person’s allowance where appropriate) that is savings income. Dividend income is taxed after savings income and accordingly dividend income doesn’t affect eligibility for the 0% starting rate.
If taxable earned and other non-savings, non-dividend income is above £17,570 for 2024/25 (or higher for those also eligible for the blind person’s allowance), the starting rate for savings will not apply to the taxable savings income.
In broad terms, the PSA nil rate band is applied to the first £1,000 of savings income for basic rate taxpayers, and the first £500 for higher rate taxpayers. More accurately, the PSA depends on Adjusted Net Income (ANI). Up to £50,270 the PSA is £1,000, then £500 up to £125,140, then zero. The use of the word ‘allowance’ is misleading as the PSA is, in fact, a zero rate tax band. ANI is total taxable income before any personal allowances and less certain deductions such as gross gift aid payments and gross relief at source pension contributions.
The PSA and the starting rate for savings are nil rate tax bands and are not therefore ‘allowances’. Despite that, until May 2023, HMRC stated in IPTM3820 that
“These allowances are not adjusted when calculating the notional tax due on the ‘sliced gain’.”
From May 2023, HMRC now state in IPTM3820 that
“Despite their names, the personal savings allowance and the starting rate for savings are nil rate tax bands and are not treated as an ‘allowance’.”
For an individual whose ANI exceeds £100,000, the amount of the personal allowance available to them in that tax year is reduced accordingly in accordance with ITA07/PT3/CH2/S35(2).
In the Budget of 11 March 2020, measures were announced allowing the personal allowance to be reinstated within the calculation for top slicing relief where it has been reduced by reason of including a gain in the individual’s income for the year. For this purpose, the personal allowance is to be calculated by reference to the taxpayer’s other income and the relevant slice.
The previous position was that where the personal allowance had been reduced, it was that reduced figure which was used in the top slicing calculation.
See below for further information and examples.
The 2020 measures were included in Finance Bill 2020. The Bill received Royal Assent on 22 July 2020 and became the Finance Act 2020.
With regard to the starting rate for savings and the amount of PSA, the position is now as follows. For gains arising in the tax year 2020/21 and earlier, neither the starting rate nor the PSA are recalculated in the TSR calculation. In contrast, for gains arising in 2021/22 onwards the amount of PSA and the starting rate for savings are recalculated based on total income in the year with only the sliced gain included. These differences only apply to the TSR calculation and not to the main income tax calculation. For example, if the client is entitled to £500 PSA because their ANI is between £50,270 and £125,140 in the main income tax calculation, but in the TSR calculation (with only the slice included in income) they are below £50,270, they would be entitled to £1,000 of PSA in the notional TSR calculation.
The key to a top slicing calculation is to divide the gain by the number of complete years. HMRC use 'N' to denote the number of complete years. 'N' which can never be less than one is calculated as follows:
Onshore |
Offshore |
|
|---|---|---|
Previous rule |
Excess event period back to commencement, or for 2nd and later events, back to the last excess gain |
Excess event period always back to commencement |
Rule change in FA13 |
As per s552(5)(e) ICTA 1988 the insurer will assume TAR does NOT apply for reporting. |
|
Full surrender |
Always back to the commencement |
Always back to commencement |
Note that an ‘excess event’ arises on a part surrender or a part assignment.
The Finance Act 2013 (FA 13) brought in updates to the chargeable events legislation in respect of time apportionment relief (TAR) to include onshore policies as well as offshore. Essentially, TAR was extended to policies issued by UK insurers on or after 6 April 2013 and to existing policies issued by UK insurers which are modified on or after that date. FA 2013 amended Section 536 (2) ITTOIA 2005 which is a section dealing with top slicing rules. Under TAR, the chargeable gain may be reduced for tax purposes if the beneficial owner was not UK resident throughout the policy period. TAR applies by virtue of S528 ITTOIA 2005.
The effect of these changes on calculation events for UK resident individuals holding offshore policies who have been UK resident throughout is therefore as follows:
Pre 06/04/13 policies
Policies made on or after 06/04/13 (or earlier policies varied etc. on or after that date)
For those UK residents who have not been UK resident throughout such that TAR applies, then the number of years used remains the period back to commencement but that figure will be reduced to reflect periods of overseas residence.
HMRC adopt a five step procedure as follows:
Calculate the total taxable income for the year and identify how much of the gain falls within the starting rate for savings, PSA, basic, higher or additional rate bands as appropriate. Any gift aid payments must be disregarded both in this computation and in the remaining steps below.
Calculate the total tax due on the gain across all tax bands. Deduct basic rate tax treated as paid* to find the individual's liability for the tax year.
Calculate the annual equivalent of the gain. The annual equivalent is calculated by dividing the gain by N (see earlier).
Calculate the individual’s liability to tax on the annual equivalent. For gains arising on or after 11 March 2020, the personal allowance is recalculated where appropriate. As stated above, the starting rate for savings and the amount of PSA is now as follows. For gains arising in 2020/21 and earlier, neither the starting rate nor the PSA are recalculated in the TSR calculation. In contrast, for gains arising in 2021/22 onwards the amount of PSA and the starting rate for savings are recalculated based on total income in the year with only the sliced gain included.
Deduct basic rate tax treated as paid* on the annual equivalent and multiply the result by N. This gives the individual's relieved liability.
Deduct the individual's relieved liability at step 4 from the individual's liability at step 2 to give the amount of top slicing relief due.
*Note: Basic rate tax is also deducted for offshore bonds for the purposes of the top slicing calculation.
There is a worked example for both onshore and offshore bonds later in this article.
Top slicing relief is not just available to mitigate a higher rate liability arising on a chargeable event gain but is also available to mitigate an additional rate liability. In 2024/25, individuals with ANI in excess of £125,140 are subject to additional rate tax of 45% on the excess (39.35% dividend additional rate).
There is a worked example where part of the gain falls into additional rate later in this article.
In this case, the total gains are added together. The 'annual equivalent' is calculated separately for each gain, and then these annual equivalents are added together.
Example
|
Top slicing relief is available to mitigate a higher rate or additional rate income tax liability arising as a result of a chargeable event gain being added to the taxpayer's total income. It does not:
HMRC Helpsheets 320 and 321 help investors fill in the relevant boxes in their tax return for gains on UK life insurance policies and foreign life insurance policies respectively. The Helpsheets are available from HMRC
Gains on UK policies are inserted into the 'Additional information' pages of the tax return. The full amount of the gain should be returned together with the number of complete years. This information is available from the chargeable event certificate issued by the insurer. If the individual is due any top slicing relief it will then be automatically calculated using the information provided.
Gains on foreign policies are inserted into the 'Foreign' pages of the tax return. A chargeable event certificate might not be available showing the gain if the policy was taken out before 6 April 2000, and for later policies the reporting requirements are not as onerous as those for UK policies. Nevertheless it remains the responsibility of the investor to report gains under self assessment principles.
HMRC – Insurance Policyholder Taxation Manual
HMRC – Self assessment guidance
Anne has a taxable salary in tax year 2024/25 of £36,100 (after personal allowances) and a chargeable event gain of £24,000 on the surrender of an investment bond that she had held for just over eight years. The basic rate band for 2024/25 is £37,700.
Her tax liability for 2024/25 before top-slicing relief is
Salary (after personal allowance) |
£36,100 |
Chargeable event gain |
£24,000 |
|
£60,100 |
Tax @20% on £36,100 |
£7,220 |
Tax @ 0% on £500 (PSA) |
£0 |
Tax @ 20% on £1,100 |
£220 |
Tax @ 40% on £22,400 |
£8,960 |
Total liability |
£16,400 |
Anne's taxable income (including the chargeable event gain) is £60,100. The gain falls within the different tax bands as follows:
PSA - £500 @ 0%
Basic Rate Band - £1,100 @ 20%
Higher Rate Band - £22,400 @ 40%
The total tax due on the bond gain across all tax bands is £9,180
The tax treated as paid on the gain is £24,000 @ 20% = £4,800
The individual’s liability for the tax year is therefore £9,180 - £4,800 = £4,380
The 'annual equivalent' of the gain £24,000 / 8 = £3,000.
The 'annual equivalent' + taxable income = £3,000 + £36,100 = £39,100.
The total tax on the slice is (£500 @ 0%) + (£1,100 @ 20%) + (£1,400 @ 40%) = £780
The tax treated as paid on the slice is £3,000 @ 20% = £600
The individual’s tax relieved liability is (£780 - £600) multiplied by “N”. In this “N” case is 8 years so the tax relieved liability is £1,440
Note that there is no need in this example to reinstate the personal allowance because it has not been reduced by reason of including a gain in Anne’s income for the year. Anne’s adjusted net income does not exceed £100,000. The starting rate for savings is not applicable because Anne’s taxable earned income is above £17,570. What about the PSA? Anne’s ANI including the bond gain is £72,670 and so she is entitled to £500 PSA because her ANI is between £50,270 and £125,140 in the main income tax calculation. In the TSR calculation (with only the slice included in income) her adjusted net income is £51,670 and accordingly no reinstatement of the PSA is necessary.
Top slicing relief = £4,380 – £1,440 = £2,940
Anne's liability after top-slicing relief is £16,400 - £2,940 = £13,460
The basic rate credit is £24,000 @ 20% = £4,800.
The overall liability is reduced to £13,460 - £4,800 = £8,660
If we took the last example of Anne, but instead the bond had been offshore, the above five steps would be identical.
Anne's liability after top slicing relief would be £16,400 - £2,940 = £13,460
There is no reduction in her liability since no basic rate credit is due for an offshore bond.
Bridgit has a taxable salary in tax year 2024/25 of £32,700 and a chargeable event gain of £160,000 on the surrender of an onshore bond on 1 June 2024 that she had held for just over eight years.
Her total income is greater than £100,000 so the basic personal allowance is reduced to zero, but reinstated at Step 4.
The starting rate for savings is not available due to Bridgit’s salary of £32,700
Regarding the PSA, her ANI is £192,700 so a zero PSA. If we substitute gain for slice, her ANI would be £52,700 giving rise to a notional PSA of £500. Accordingly we need to reinstate the £500 PSA at step 4.
Her tax liability for 2024/25 before top-slicing relief is:
Salary |
£32,700 |
Chargeable event gain |
£160,000 |
£192,700 |
|
Tax @ 20% on £32,700 |
£6,540 |
Tax @ 20% on £5,000 |
£1,000 |
Tax @40% on £87,440 |
£34,976 |
Tax @45% on £67,560 |
£30,402 |
Total liability |
£72,918 |
Bridgit's taxable income (including the chargeable event gain) is £192,700. The gain falls within the different tax bands as follows:
Basic Rate Band - £5,000 @ 20%
Higher Rate Band - £87,440 @ 40%
Additional Rate Band - £67,560 @ 45%
The total tax due on the bond gain across all tax bands is £66,378
The tax treated as paid on the gain is £160,000 x 20% = £32,000
The individual’s liability for the tax year is therefore £66,378 - £32,000 = £34,378
The 'annual equivalent' of the gain £160,000 / 8 = £20,000
In this step, we add Bridgit’s salary of £32,700 to the £20,000 slice to give us a notional ANI of £52,700. As this figure is below £100,000 the full personal allowance will be reinstated, in this step only. As detailed later in the article, her personal allowance must be set against her salary in preference to the gain.
The starting rate for savings is not applicable because Bridgit’s taxable earned income is above £17,570. What about the PSA? Bridgit’s ANI including the bond gain is £52,700 and so she is entitled to £500 PSA.
With regard to the salary, £12,570 is taxed at 0% within the personal allowance. The balance of £20,130 is taxed at 20%. The bond slice of £20,000 will then be taxed as follows.
The total tax on the £20,000 slice is (£500 @ 0%) +(£17,070 @ 20%) + (£2,430 @ 40%) = £4,386
The tax treated as paid on the slice is £20,000 @ 20% = £4,000
The individual’s relieved liability is (£4,386 - £4,000) multiplied by “N”. In this “N” case is 8 years so the tax relieved liability is £3,088.
Top slicing relief = £34,378 – £3,088 = £31,290
Firstly, bear in mind that the FA 2020 top slicing measures only apply with effect from 11 March 2020 and may not be applied retrospectively.
When calculating top slicing relief, the starting rate for savings and the PSA must be considered. Originally, unlike the personal allowance situation (see below), HMRC considered that from 11 March 2020, there should be no recalculation in step 4 when calculating the notional tax due on the slice. The position now is that for gains arising in 2021/22 onwards the amount of PSA and the starting rate for savings are recalculated based on total income in the year with only the sliced gain included.
What about the personal allowance? Where an individual has ANI over £100,000 and their personal allowance is reduced then the position for gains arising on or after 11 March 2020 is that the reduced personal allowance is recalculated for the purposes of Step 4 of the top slicing relief calculation only.
Budget 2020 also confirmed that within the calculation of top slicing relief, reliefs and allowances available must now (i.e. from 11 March 2020) be set-off, as far as possible, against other income in preference to the gain. This is reiterated in IPTM 3820. This means that the rules comprised in S25(2) of ITA 2007 do not apply – these rules require reliefs and allowances to be set against income in a way that results in the greatest reduction in an individual’s income tax liability.
ExampleIn 2024/25 Fraser has salary of £25,140 and on 1 July 2024 he surrenders a bond held for 10 years with a gain of £100,000.
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The March 2020 Top Slicing Relief changes were announced as taking effect from the date of the Budget (11 March 2020). This led to questions concerning those with chargeable event gains prior to that date.
On 20 July 2020, HMRC confirmed to the Chartered Institute of Taxation (CIOT) that the mode of calculation as set out in the March 2020 Budget (and which is now included in the Finance Act) will be applied, ‘by concession’, to any gains in both 2018/19 and 2019/20 tax years. This was subsequently confirmed in Agent Update 79. Originally, Agent Update 78, indicated that HMRC would only be applying the new provisions to 2019/20 gains.
HMRC started an automatic process to identify any taxpayers who filed in 2018/19 and should have benefited from more of their personal allowance in their Top-Slicing Relief computation. HMRC have said that amendments made will only be favourable to taxpayers although the CIOT understands it is possible this new treatment is not always in the taxpayer’s favour.
From 2020/21, HMRC’s Self-Assessment calculator should produce the right result and returns should not need to be filed manually.
Chargeable event gains which arose in 2017/18 are in time for overpayment relief claims only up to 5 April 2022.
In this tax case relating to the 2017/18 tax year, the First-tier Tribunal confirmed that the legislation introduced in 2020 removing beneficial ordering was not clarification of existing legislation and did not have retrospective effect.
Tim Good (of Absolute Accounting Software Ltd) who represented the taxpayer in the above case commented that the Judge agreed that when applying beneficial ordering, the legislation requires that the income tax liability rather than income tax payable is to be minimised (i.e. before rather than after deducting any notional bond tax credit). This may occasionally result in higher overall tax payable than calculated by the current HMRC self-assessment calculator in respect of gains arising on or after 11 March 2020.
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