IPTM3850 | Top slicing relief: examples

The examples below show how to calculate TSR on gains arising in the tax year 2022/23.

Example 1 – one chargeable event

In 2022/23 Amanda has taxable employment income of £45,000.

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 is treated as having been paid on the full amount of the gain. In this case, the basic rate tax treated as paid would be £10,000 (20% of £50,000).

For 2022/23, higher-rate tax applies when taxable income exceeds £37,700.

As Amanda is a higher rate taxpayer in 2022/23, her personal savings allowance nil rate tax band is £500.

The starting rate for savings is nil as Amanda’s total non-savings income is above the personal allowance plus £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 £95,000 and this income falls within the various tax bands as follows:

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 £18,846
Less Basic Rate tax treated as paid (£10,000)
Total liability for the year £8,846

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:

The basic rate tax treated as paid on the annual equivalent is £10,000 x 20% = £2,000.

The relieved liability is therefore £846 (£2,846 - £2,000). This is then multiplied by N (5) to find the total relieved liability. In this case the total relived liability is £846 * 5 = £4,230.

Step 5 – calculate top slicing relief due

Top slicing relief is the difference between the total liability and relieved liability, in this case £8,846 - £4,230 = £4,616.

Amanda’s top slicing relief for 2022/23 is £4,616.

Example 2 – two chargeable events

In 2022/23 Amanda has taxable employment income of £40,000.

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 is treated as having been paid on the amount of the gain. In this case, the basic rate tax treated as paid would be £10,000 (20% of £50,000).

She also has a chargeable event gain of £10,000 on a surrender of a policy held for 4 years. As a UK policy, basic rate tax is treated as having been paid on the amount of the gain. In this case the basic tax treated as paid would be £2,000 (20% of £10,000).

Amanda’s taxable income for the year is therefore £100,000 (£40,000 employment income + £50,000 gain + £10,000 gain).

For 2022/23, higher-rate tax applies when taxable income exceeds £37,700.

As Amanda is a higher rate taxpayer this year. Her personal savings allowance nil rate tax band 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 falls within the various rate bands as follows:

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 £21,846

Less basic rate tax treated as paid £12,000

Total liability £9,846

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:

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 £2,846 - £2,500 = £346.

Step 5 – find the total relieved liability

To find the total relieved liability, multiply £346 by the gain on the policy. In this case £346 * £60,000 = £20,760,000.

Step 6– find the total relived liability

The total relieved liability is then given by dividing the figure at step 5 by the annual equivalent (step 3). £20,760,000 / £12,500 = £1,660.80.

Step 7 – calculate top slicing relief due

Top slicing relief is the difference between the total liability (step 2) and the total relieved liability (step 6). In this case £9,846 - £1,660.80 = £8,185.20.

Example 3 – additional rate tax

Mike has taxable employment income in the tax year 2022/23 of £50,000 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 his personal allowance is reduced, in this case Mike’s personal allowance is nil. As Mike is an additional rate taxpayer this year, his personal savings allowance nil rate tax band is 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 – calculate total taxable income for the year and identify how much of the gain falls within the relevant tax bands

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

Step 2 – calculate total liability for the year

Total tax chargeable on gains £62,500

Less basic rate tax treated as paid £30,000

Total liability £32,500

Step 3 – calculate the annual equivalent

£150,000/5 = £30,000

Step 4 – find the total relieved liability

At this stage of the calculation the amount of Personal Allowance available is recalculated with only the sliced gain included. With only the sliced gain included Mike’s total income is £80,000. This is the £50,000 employment income plus the £30,000 annual equivalent. Therefore, Mike can benefit from the Personal Allowance. The Personal Savings Allowance is also recalculated at this stage and is now £500.

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

The relieved liability is therefore £5,800 (£11,800 - £6,000).

The relieved liability is multiplied this by N to find the total relieved liability. In this case £5,800 * 5 = £29,000.

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 £32,500 - £29,000 = £3,500.