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HMRC internal manual

Insurance Policyholder Taxation Manual

Deficiency relief: how relief is given

Deficiency relief is given as a tax reduction, that is as a set-off against an individual’s income tax liability for the year. However, it is calculated by reference to the various types of income against which the deficiency is attributed and its effect is limited to the individual’s extra tax on that income where it is liable at the higher rate only. Unless income is liable at higher rate or dividend upper rate on some income, there will be no tax reduction and deficiency relief will be of no benefit. Deficiency relief will not reduce the amount of tax due on income liable at the additional rate or the dividend additional rate of income tax.

Extra tax on income liable at higher rate or dividend upper rate of tax

The extra tax on income liable at the higher rate or dividend upper rate of tax depends on the nature of the income. It is the difference between the liability on that income under the normal rules before deficiency relief, and the liability on that income assuming that it is wholly liable at

  • the basic rate, for other income (apart from dividend income), such as employment income
  • dividend ordinary rate, for dividend income.


Where there is no dividend income, extending the basic rate tax band by the amount of deficiency relief will give the correct tax effect by restricting the benefit of the relief to the extra liability.

Where the deficiency relief is set against dividend income, matters are more complex but the relief will be limited to the liability on the dividend income at the difference between the upper and ordinary dividend rates.

Deficiency relief has no effect on age-related allowances, apart from the rare exception referred to below.

Relief is due for the tax year in which the policy comes to an end.

Exception for certain life annuity contracts

The only exception to the limitations described above is in the rare case of a life annuity contract made

  • after 26 March 1974, but
  • in an accounting period of the insurer beginning before 1 January 1992.


If deficiency relief arises on such a contract then it is given as a deduction in full against total income, without restriction.

Further reference and feedback IPTM1013