IPTM3840 - Top slicing relief: how relief is given

Top slicing relief is given in terms of tax reduction. A common misconception is to enter on the tax return the gain divided by the number of years. This is incorrect. 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.

For the purposes of calculating top slicing relief, chargeable event gains are treated as the top slice of total income.

One chargeable event

Step 1: Calculate the total taxable income for the year and identify how much of the gain falls within the starting rate for savings, personal savings allowance nil rate, basic, higher or additional rate bands as appropriate.

Step 2: Calculate the total tax due on the gain across all tax bands. Deduct basic rate tax treated as paid to find the total liability for the tax year.

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

Step 4: Calculate the individual’s liability to tax on the annual equivalent. Deduct basic rate tax treated as paid on the annual equivalent and multiply the result by N. This gives the total relieved liability.

Step 5: Deduct the total relieved liability at step 4 from the total liability at step 2 to give the amount of top slicing relief due.

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. If a policy has given rise to deficiency relief for that tax year – see IPTM3860 – the relief is deducted in calculating the aggregate.

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 to arrive at the total annual equivalent.

Step 4: Calculate the total liability to tax on the total annual equivalent. Deduct basic rate tax treated as paid on the total annual equivalent.

Step 5: Multiply the result at step 4 by the full gain on the policy.

Step 6: Divide the result at step 5 by the total annual equivalent at step 3. The result is the total relieved liability.

Step 7: Deduct the total relieved liability at step 6 from the total liability at step 2 to give the amount of top slicing relief due.