IPTM3820 - Top slicing relief: general

The chargeable event regime taxes gains on a realisations basis, rather than accruals basis. Some taxpayers may benefit from this, for example where their gain is deferred to a time when they have less taxable income, such as in retirement. However, other taxpayers may be disadvantaged when the growth that accrued over the duration of their policy is all brought into charge in a single tax year. To mitigate the impact of this, top slicing relief may be available.

Relief is generally available where the taxpayer would be liable to tax at a lower tax rate, were it not for the inclusion of the chargeable event gain in their income for that tax year. Even when the chargeable event gain does not move a taxpayer from a lower tax rate into a higher tax rate, there may still be some top slicing relief available, due to the effects of the personal savings allowance nil rate tax band and the starting rate for savings.

The relief is only available to individuals. It is not available to companies, trustees or personal representatives.

Top slicing relief (TSR) is given by comparing the amount of tax due on the full chargeable event gain to the amount of tax due on the ‘sliced’ annual equivalent of the gain. For example, a £100,000 gain on a policy over 10 years would have an annual equivalent of £10,000 (£100,000 / 10 years = £10,000).

The amount of tax charged on the full gain is often given in the main income tax calculation. In order to calculate the tax due on the sliced gain a separate calculation is required (the TSR calculation). The steps for the TSR calculation are given at s535-537 Income Tax (Trading and Other Income) Act 2005. The main income tax calculation and the TSR calculation are broadly similar but there are some minor differences:

• The amount of Personal Allowance available in the TSR calculation is recalculated based on total income in the year with only the sliced gain included. This applies to gains arising in 2018/19 onwards. For gains arising in earlier tax years, the personal allowance is not to be recalculated.
• The amount of personal savings allowance and the starting rate for savings are recalculated based on total income in the year with only the sliced gain included. This applies to gains arising in 2021/22 onwards. For gains arising in the tax year 2020/21 and earlier, neither the personal savings allowance nor the starting rate for savings are to be recalculated in the TSR calculation.
• Reliefs and allowances available for deduction must be set off against all other income in preference to the annual equivalent.
• When determining total income in the TSR calculation, income arising from premiums on leases and employment termination payments is ignored.

The differences shown above only apply to the TSR calculation and not to the main income tax calculation. Example TSR calculations are shown at IPTM3850.

The Personal Savings Allowance and the Starting Rate for Savings

When calculating top slicing relief, the starting rate for savings and the personal savings allowance must also be considered. Despite their names, the personal savings allowance and the starting rate for savings are nil rate tax bands and are not treated as an ‘allowance’.

Certain customers may receive up to £5,000 of savings income and not pay tax on it. This is called the starting rate for savings. The more you earn in other income (for example wages or pension), the less your starting rate for savings will be.

For each tax year, the starting rate for savings is determined by reference to the personal allowance. If your other (non-savings) income is equal to or more than the sum of your personal allowance and £5,000 (so, for example, for the tax year 2022/23 it is more than £17,570), you are not eligible for the starting rate for savings. If your other income is less than the sum of your personal allowance and £5,000, your starting rate for savings may be a maximum of £5,000. Every £1 of other income above your personal allowance reduces your starting rate by £1.

The personal savings allowance nil rate tax band is applied to:

•the first £1,000 of savings income for basic rate taxpayers
•the first £500 of savings income for higher rate taxpayers.

It is not available to additional rate taxpayers.

More information about the starting rate for savings and personal savings allowance can be found on https://www.gov.uk/apply-tax-free-interest-on-savings.

For gains arising in the tax year 2021/22 and onwards the personal savings allowance and starting rate for savings may be recalculated in the TSR calculation.

For example, if the customer is entitled to £500 personal savings allowance in the main income tax calculation because they are a higher rate taxpayer, but in the TSR calculation (with only the annual equivalent included in income) they are considered to be a basic rate taxpayer, they would be entitled to £1,000 of personal savings allowance in the notional TSR calculation.

For gains arising in the tax year 2020/21 and earlier, neither the personal savings allowance nor the starting rate for savings are to be recalculated in the TSR calculation. Whatever the customer’s entitlement to them is in the main income tax calculation, that entitlement would remain the same for the purposes of the notional TSR calculation.

Reduced Personal Allowances

The personal allowance, where reduced by ITA07/S35(2), is to be recalculated for the purposes of the top slicing relief calculation only.

This change will benefit taxpayers whose personal allowance has been reduced because the inclusion of the gain has caused their adjusted net income to exceed £100,000.

The new rules take effect from 11 March 2020, however, in practice we will apply this new treatment to all gains arising in the tax year 2018/19 onwards.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Additional Points

There is no top slicing in computing income for the purposes of calculating entitlement to age-related allowances, or child or working tax credits. The full amount of the gain is included for these purposes.

Special rules apply to ‘foreign policies’. See IPTM3830 for more information.