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HMRC internal manual

Insurance Policyholder Taxation Manual

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HM Revenue & Customs
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Top slicing relief: examples

Example 1 - one chargeable event

Amanda has taxable employment income in tax year 2008-2009 of £32,850 (that is, after personal allowances) and a chargeable event gain of £24,500 on the surrender of a life policy that she has held for just over 7 years. For 2008-2009, higher-rate tax applies when taxable income exceeds £34,800.

Computations

As the chargeable event is a full surrender, the number of complete years N is 7.

Amanda’s total taxable income including chargeable event gain is £57,350 (that is, £32,850 + £24,500). This income falls in the various tax bands as follows:

Tax rate Amount of total income £ Tax chargeable £
     
20% 34,800 6,960.00
40% 22,550 9,020.00
Total 57,350 15,980.00

The amount of gain falling in the higher rate band is £22,550. The rate of ‘further’ tax on this amount is 20%, namely 40% - 20%. The ‘further’ tax is then £22,550 x 20% = £4,510.00.

The ‘annual equivalent’ of the gain is £3,500 (that is, £24,500/7) and £1,550 (that is £32,850 + £3,500 = £36,350 - £34,800) of this amount would fall in the higher rate band. The ’further’ tax is £1,550 x 20% = £310.00. Multiplyingby N (7) gives £2,170.00

The amount of top-slicing relief is £4,510.00 - £2,170.00 = £2,340.00, which is given in terms of tax against Amanda’s total tax liability for the year.

Her tax liability, after top slicing relief, is £15,980.00 - £2,340.00 = £13,640.00.

If Amanda’s policy is from a UK insurer then tax treated as paid on the chargeable event gain is £24,500 x 20% = £4,900.00 and that means her net liability is £13,640.00 - £4,900.00 = £8,740.00.

If her policy is from an overseas insurer, no tax is treated as paid and her overall tax liability remains £13,640.00.

Example 2 - two chargeable events

Circumstances as in example 1, except that there is also a chargeable event gain of £10,000 on a surrender of a policy held for 4 years.

Computations

Amount of gains falling in the higher rate band is £32,550 and ‘further’ tax at 20% is £6,510.00.

Total of the annual equivalents is (£24,500/7) + (£10,000/4) = £6,000 and £4,050 (that is £32,850 + £6,000 = £38,850 - £34,800) of this would fall in the higher rate band. The ’further’ tax is £4,050 x 20% = £810.00.

Multiplying by total of gains and dividing by total of annual equivalents:

£810.00 x £34,500/£6,000 = £4,657.50.

Then the amount of top-slicing relief is £6,510.00 - £4,657.50 = £1,852.50.

Example 3 - additional rate tax

Amanda has taxable employment income in the tax year 2010/11 of £20,000 and a chargeable event gain of £150,000 on the surrender of a life policy that she has held for just over 5 years.

Her total income is greater than £100,000 so the basic personal allowance is reduced to nil.

The chargeable event gain is treated as the highest slice of her overall income and is taxable at each of the basic, higher and additional rates of tax.

 

Tax rate Income in band £ Amount of gain in band £
     
20% 37,400 17,400
40% 112,600 112,600
50% 20,000 20,000
Total 170,000 150,000

Computations

  • £112,600 of the gain falls in the higher rate band and £20,000 in the additional rate band. The rates for the further tax on these amounts are 20% and 30% respectively, that is 40% - 20% and 50% - 20%. The further tax from these amounts is then £112,600 x 20% = £22,520 and £20,000 x 30% = £6,000, a total of £28,520.
  • The ‘annual equivalent’ of the gain is £30,000 (that is, £150,000/5) and £12,600 (that is, £20,000 + £30,000 = £50,000 - £37,400) of this amount would fall in the higher rate band. The higher rate tax is £12,600 x 20% = £2,520. Multiplying by N (5 years) gives £12,600.

(If part of the ‘annual equivalent’ of the gain were also to fall into the additional rate band, the sum of this stage would include that amount x 30%.)

  • Then, the amount of top-slicing relief is £28,520 - £12,600 = £15,920 and this amount is deducted from Amanda’s total tax liability for the year.

 

Further reference and feedback IPTM1013