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HMRC internal manual

Insurance Policyholder Taxation Manual

Top slicing relief: examples

For each of the following examples the tax year is 2016/17. During this period the higher tax rate applies when taxable income exceeds £32,000 and the additional tax rate applies when taxable income exceeds £150,000.

Example 1 - one chargeable event

In 2016/17 Amanda has taxable employment income of £30,000, net of the personal allowance. She has a chargeable event gain of £50,000 on the full surrender of a life insurance policy which she has held for 5 years.  As this is a UK policy, basic rate tax will be treated as having been paid on the amount of the gain, in this case £10,000.

For 2016/17, higher-rate tax applies when taxable income exceeds £32,000.

As Amanda is a higher rate taxpayer this year. Her personal savings allowance is £500.

The starting rate for savings will not be due as Amanda’s total non-savings income above the personal allowance exceeds £5,000.

 

Step 1 – calculate total taxable income for the year and identify how much of the gain falls within the relevant tax bands.

Amanda’s total taxable income is £80,000 and this income falls within the various tax bands as follows:

 

Source Amount Band Rate Tax Due
         
Employment 30,000 Basic Rate 20% 6,000
         
Chargeable event gain 500 Personal Savings Allowance 0%  
  1,500 Basic Rate 20% 300
  48,000 Higher Rate 40% 19,200
         
Total Liability       25,500

 

Relief will be due if Amanda’s liability for the tax year exceeds her relieved liability for the year

Step 2 – calculate total liability for the year

Total tax chargeable on the gain     £19,500

Less Basic Rate tax treated as paid (£10,000)

Total liability for the year                 £9,500

Step 3 – calculate the annual equivalent

The annual equivalent is the total gain divided by the number of years the policy has been in force (N).  In this case the annual equivalent is £50,000/5 = £10,000.

Step 4 – find the total relieved liability

The liability to tax on the annual equivalent is as follows:

500 x 0%                   =0

1,500 x 20%              =300

8,000 x 40%              = 3,200

Liability to tax                        = 3,500

The BR treated as paid on the annual equivalent is £10,000 x 20% = £2000

The relieved liability is therefore £1,500 (namely £3,500 - £2,000) and we multiply this by N (5) to find the total relieved liability, in this case £7,500.

Step 5 – calculate top-slicing relief due

Top slicing relief is the difference between the total liability and relieved liability, in this case £9,500 - £7,500 = £2,000.

 

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.  Amanda’s total income in the year is £101,000 and her personal allowance has been reduced to £10,500 accordingly as per ITA07/PT3/CH2/S35(2).  Amanda’s taxable income for the year is therefore £90,500 (£30,500 employment income + £50,000 gain + £10,000 gain).

As these are UK policies, basic rate tax will be treated as having been paid on the amount of the gains, in this case £10,000 on the gain of £50,000 and £2,000 on the gain of £10,000.

For 2016/17, higher-rate tax applies when taxable income exceeds £32,000.

As Amanda is a higher rate taxpayer this year. Her personal savings allowance is £500.

The starting rate for savings will not be due as Amanda’s total non-savings income above the personal allowance exceeds £5,000.

 

 

Step 1

Amanda’s total taxable income falls within the various rate bands as follows:

 

Source Amount Band Rate Tax Due
         
Employment 30,500 Basic Rate 20% 6,100
         
Chargeable event gain 500 Personal savings allowances 0%  
  1,000 Basic Rate 20% 200
  58,500 Higher Rate 40% 23,400
         
Total Liability       29,700

 

Relief will be due if Amanda’s liability for the tax year exceeds her relieved liability for the year

Step 2 – calculate total liability for the year

Total tax chargeable on gains                       £23,600

Less basic rate tax treated as paid  £12,000

Total liability                                      £11,600

Step 3 – calculate the annual equivalent

Gain 1 - £50,000/5 = £10,000

Gain 2 - £10,000/4 = £2,500

Total annual equivalent = £12,500

Step 4 – find the relieved liability

The liability to tax on the annual equivalent is as follows:

500 x 0%                   =£0

1,000 x 20%              =£200

11,000 x 40%                        =£4,400

Liability to tax = £4,600

Deduct basic rate tax treated as paid on the annual equivalent which is:

£12,500 x 20% = £2,500

The relieved liability on this slice is therefore £2,100 (namely £4,600 - £2,500).

Step 5 – Find the total relieved liability

To find the total relieved liability multiply £2,100 by the total gains chargeable to tax in the year (£60,000) then divide the result by the total annual equivalent of £12,500 = £10,080

Step 6 – calculate top-slicing relief due

Top slicing relief is the difference between the total liability and the total relieved liability, in this case £11,600 - £10,080 = £1,520.

Example 3 – additional rate tax

Mike has taxable employment income in the tax year 2016/17 of £20,000 and a chargeable event gain of £150,000 on the surrender of a life policy that he has held for just over 5 years.

His total income is greater than £100,000 so the basic personal allowance is reduced to nil.  The amount available to set against the personal savings allowance is also nil.

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

Step 1 – Mike’s total taxable income falls within the various bands as follows:

 

Source Amount Band Rate Tax Due
         
Employment 20,000 Basic Rate 20% 4,000
         
Chargeable event gain 12,000 Basic Rate 20% 2,400
  118,000 Higher Rate 40% 47,200
  20,000 Additional Rate 45% 9,000
         
Total Liability       65,520

 

Step 2 – calculate total liability for the year

Total tax chargeable on gains                      £58,600

Less basic rate tax treated as paid  £30,000

Total liability                                      £28,600

Step 3 – calculate the annual equivalent

£150,000/5 = £30,000

Step 4 – find the total relieved liability

12,000 x 20%                        £2,400

18,000 x 40%                        £7,200

Liability to tax                        £9,600

The basic rate tax treated as paid on the annual equivalent is £30,000 x 20% = £6,000

The relieved liability is therefore £3,600 and we multiply this by N to find the total relieved liability, in this case £18,000.

Step 5 – calculate top-slicing relief due

Top slicing relief is the difference between the total liability and the total relieved liability, in this case £28,600 - £18,000 = £10,600