What is Top-Slicing?
Top-slicing relief was introduced by HMRC as a fair way of calculating a gain that had built up over a number of years without it having a huge impact on an individuals rate of tax.
Top-slicing
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What is top-slicing?
Top-slicing relief (TSR) allows a gain made on the policy to be annualised. This allows the policy owner to pay tax at a rate equivalent to the rate that would have applied if the gain had been taxable in each year it was made.
The Calculation
The top-slicing relief calculation is complex and will depend on an individual’s personal circumstances, and any other income that they receive. There is generally a 5 Step process in calculating TSR.
Step 1
Calculate the taxable income for the year and identify how much of the gain falls within the relevant tax bands: (starting rate for savings, personal savings allowance (PSA), nil rate, basic, higher or additional rate bands).
Step 2
- Calculate the total tax due on the gain across all tax bands (based on information from step 1).
- Calculate basic tax treated as paid on the total gain (even though it is a foreign life policy).
- Deduct the amount of basic tax treated as paid from total tax due on gain to find the individual’s liability for the tax year.
Step 3
Calculate the annual equivalent of the gain. The annual equivalent is calculated by dividing the total gain by N.
Excess Events:
Pre-6 April 2013 policies: The starting point for determining N is the commencement of the policy.
Policies issued or varied on or after 6 April 2013:
- Where the policyholder has always been UK resident, time apportionment relief (TAR) will not apply. The period for N is the later of commencement or the last excess event.
- Where the policyholder has a period of non-residence, TAR will apply. The period for N starts from commencement of the policy and is reduced by any period of residence overseas.
Final Events:
For all policies, the starting point for determining N is the commencement date of the policy, but where TAR applies, N is reduced by any period of residence overseas.
Step 4
- Add individual’s other income to the annual equivalent to give a notional adjusted income.
- Calculate total tax due on the annual equivalent of the gain.
! In this step it may be possible to reinstate the personal allowance, but not the personal saving allowance.
- Calculate basic tax treated as paid on the annual equivalent (even though it is a foreign life policy).
- Deduct the amount of basic tax treated as paid from total tax due on gain annual equivalent.
- Multiply by N. This gives the individual’s relieved liability.
Step 5
Deduct the individual’s relieved liability (step 4) from individual’s liability (step 2) to give the amount of top slicing relief available.
Total tax on gain = (step 2*) minus top slicing relief (step 5).
* This is total tax on gain and not individual liability also confirmed in step 2.
When top slicing relief does not apply
1) It doesn’t reduce income below £100,000 to preserve full entitlement to the personal allowance.
2) It is only available to individuals. It cannot be claimed by trustees, executors/personal representatives, or corporate entities.
3) It does not apply to annual gains that arise on ‘personal portfolio policy events'.
You can find further information on Top-Slicing Relief as well as an example in our guide.