Changes to Top Slicing Relief on life insurance policy gains from 11 March 2020
Published 11 March 2020
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Who is likely to be affected
Individuals who have made gains on life insurance policies and claim Top Slicing Relief (TSR).
General description of the measure
This measure allows the personal allowance to be reinstated within the calculation for TSR. This provides additional relief for taxpayers whose entitlement to the personal allowance has been reduced because a gain is included as part of their income.
The measure also clarifies the treatment of allowances and reliefs within the TSR calculation by confirming that they must be set as far as possible against other income in preference to the gain. This will ensure that the relief is calculated in a fair and consistent way.
Policy objective
The measure supports the government’s objective of promoting fairness in the tax system by ensuring TSR is calculated in a consistent and fair way.
The original policy intent of TSR was to provide relief to taxpayers who have become subject to a higher rate of tax due to a gain being included in their income. The change to the treatment of reduced personal allowances, as set out in this measure, is in line with that original policy intent.
Background to the measure
This measure was announced at Budget 2020.
Detailed proposal
Operative date
The measure will have effect for all relevant gains occurring on or after announcement at Budget 2020.
Current law
The current law is set out in Chapter 9, Part 4 Income Tax (Trading and Other Income) Act 2005. This is known as the chargeable event gain regime. These rules ensure that gains made by individuals from their policies are subject to income tax at the individual’s marginal rate.
Within Chapter 9, sections 535 to 537 set out how TSR is to be calculated. Life insurance policy gains accrue over a number of years but are taxed in one year. This can result in gains being taxed at a higher rate. TSR was designed to mitigate the impact of this higher tax charge.
Proposed revisions
Finance Bill 2020 will include amendments to sections 535 to 537 to put beyond doubt the effect of the legislation.
The amendments will:
- permit the personal allowance to be reinstated within the taxpayer’s TSR calculation where it has been reduced by reason of including a gain in their income for the year. For this purpose, the personal allowance will be calculated by reference to the taxpayer’s other income and a proportion of the gain; and
- confirm that, in the TSR calculation, allowances and reliefs have to be set as far as possible against other income in preference to the gain
Summary of impacts
Exchequer impact (£ million)
| 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 |
|---|---|---|---|---|---|
| - | negligible | -15 | -15 | -15 | -20 |
These figures are set out in Table 2.1 of Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020. This measure also supports the Exchequer in its commitment to protect revenue.
Economic impact
This measure is not expected to have significant macroeconomic impacts.
Impact on individuals, households and families
This measure is expected to impact around 2,000 of the 45,000 individuals who return gains annually. These individuals will benefit from the reinstatement of personal allowances. There is not expected to be any impact on family formation, stability or breakdown.
Customer experience is expected to improve as the measure provides clarity on how the relief is calculated and will ensure that affected taxpayers benefit from the correct amount of relief.
Equalities impacts
This measure applies to individuals incurring gains on life insurance policies only. This measure will affect individuals within the protected equality groups that tend to be represented amongst those with above average income.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on around 200 life insurance companies who offer life insurance policies to UK customers.
The measure will not create an additional tax charge for those companies. One-off costs include familiarisation with the new rule as well as updating existing guidance on TSR following implementation. There are not expected to be any on-going costs.
There is expected to be no impact on civil society organisations.
Customer experience is expected to stay the same as the obligations of life insurance companies, in relation to this relief, remain unchanged.
Operational impact (£ million) (HMRC or other)
The changes will result in one-off costs which are estimated to be in the region of £400,000 to deliver the IT solution to support this measure.
Other impacts
This measure will have no impact on climate and fuel poverty targets, or on air quality targets.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Laura Parker on Telephone: 03000 535613 or email: Laura.Parker2@hmrc.gov.uk