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HMRC internal manual

Insurance Policyholder Taxation Manual

Top slicing relief: how relief is given

Top slicing relief is given in terms of tax. A common misconception is to enter on the tax return the gain divided by the number of years. This is incorrect and the full amount of the gain should be returned. Several steps are involved in the computation, which depends on whether there is a single chargeable event during the tax year, or more than one.

One chargeable event

Step 1: Compute the amount of the chargeable event gain that falls in the higher rate tax band and, if appropriate, the amount that falls in the additional rate tax band, on the assumption that the chargeable event gain forms the ‘highest part’ of total income, including the full chargeable event gain. Any gift aid payments must be disregarded, both in this computation and in the remaining steps below. In particular, in calculating the amount of top-slicing relief the basic rate band must not be extended by any gift aid payments made.

If all of the chargeable event gain falls in:

  • the basic rate band, or
  • either the higher or additional rate band,

 

then no top slicing relief is due. In either case, Steps 2 to 6 are not needed.

Step 2: Calculate the ‘further tax’ due on the gain. This is the ‘Step 2 liability’ and is the total of:

  • for the amount of gain falling into the higher rate band, this amount multiplied by the difference between the higher and basic rates (for example 40% - 20% = 20%), and
  • if an amount of gain falls into the additional rate band, this amount multiplied by the difference between the additional and basic rates (for example 50% - 20% = 30%).

 

Step 3: The ‘annual equivalent’ of the gain is calculated by dividing the gain by N (as in IPTM3830).

Step 4: Compute the amount of the ‘annual equivalent’ that falls in the higher rate band and, if appropriate, the additional rate band, on the assumption that it forms the top slice of total income, in place of the full gain.

Step 5: Calculate the amount of ‘further tax’ on the amount of the annual equivalent that falls in the higher rate band and, if appropriate, the additional rate band (see Step 2 for how the ‘further tax’ calculation works). Then multiply this amount of tax by N to get the ‘Step 5 liability’.

Step 6: The amount of top-slicing relief is then the ‘Step 2 liability’ less the ‘Step 5 liability’.

Two or more chargeable events

Steps 1 and 2: These are the same as the Steps 1 and 2 where there is just one chargeable event, but instead take the total of the gains on all of the chargeable events.

Step 3: Calculate the ‘annual equivalent’ for each gain by dividing it by N (as in IPTM3830) that applies to that gain and then add all these annual equivalents.

Step 4: Take the total of the annual equivalents from Step 3 and compute how much of the total falls in the higher rate band and, if appropriate, the additional rate band, on the assumption that it forms the top slice of total income in place of the total chargeable event gains.

Step 5: Calculate the amount of ‘further tax’ on the total of the annual equivalents that fall in the higher rate band and, if appropriate, the additional rate band. (See Step 2 above for how the ‘further tax’ calculation works but using ‘total of the annual equivalents’ instead of ‘gain’.)

Step 6: Multiply this amount by the total of all the chargeable event gains in the tax year and then divide it by the Step 3 total annual equivalents. This is the ‘Step 6 liability’.

Step 7: The amount of top-slicing relief is the ‘Step 2 liability’ less the ‘Step 6 liability’.

This method of computing and giving top slicing relief means that any top-slicing relief due only relieves tax at the higher and, if appropriate, additional rate.

Further reference and feedback IPTM1013