How to calculate top-slicing relief: the five steps

Top-slicing relief stops a bond gain being taxed as if it all arose in one year. The mechanism has a fixed five-step shape (IPTM3840; ITTOIA 2005 ss.535–537): calculate the liability on the full gain and on one annual slice, including the required basic-rate deductions. Multiply the per-slice liability by N before comparing it with the full-gain liability. Here it runs end to end on one offshore bond.

The case

An offshore bond is fully surrendered in 2025/26. The gain before any TAR is £60,000, built over six complete years, so the annual equivalent — the slice — is £10,000. The member has £35,000 of other income. These are figures our calculator is checked against on every change, not round illustrations — though the case is our own, not an HMRC example (HMRC's published examples at IPTM3850 are all UK policies).

The five steps

Step 1 — total liability. Work out the member's income tax for the year with the whole £60,000 gain before any TAR included, as the top slice of income. Step 2 — the tax on the gain. Strip out the part of that liability that is attributable to the gain itself. At the full-gain income level — total income £95,000, so higher-rate and the personal savings allowance is £500 — the raw tax on the gain is £20,846. An offshore bond has no basic-rate credit against the member's actual liability. But s.531(1) requires the s.530 deduction to be used inside this s.535 relief calculation only, so the two relief-comparison legs are measured consistently (IPTM3830). Here the deduction is 20% × (£60,000 − £0 unused PA, since the £35,000 of other income already exceeds it) = £12,000, cutting the tax attributable to the gain for the relief calculation to £8,846. That £12,000 is not tax paid and does not reduce the real offshore liability directly.

Step 3 — the annual equivalent. Divide the gain by the number of complete years: £60,000 ÷ 6 = £10,000, the “slice”. Step 4 — the relieved liability. Work out the tax on just one slice — £10,000 — added to the other income. Notional income is £45,000, basic-rate, so the PSA here is recomputed to £1,000. IPTM3820 applies the sliced-income PSA and starting-rate recalculation from 2021/22; its personal-allowance recalculation applies from 2018/19, following legislation effective 11 March 2020 and HMRC’s earlier-year treatment. The same calculation-only deduction applies to the slice too (20% × £10,000 = £2,000), which more than covers the small residual tax on the slice — the relieved liability floors at £0. Multiply that per-slice liability by the six complete years to get the total relieved liability: £0 × 6 = £0. Step 5 — the relief. Deduct the relieved liability at Step 4 from the tax on the gain at Step 2: £8,846 − £0 = £8,846.

Worked-example basis: No time-apportioned reduction is due for any gain or policy shown. TAR is not calculated or applied. Raw gains are shown before any TAR.

The relief here is £8,846 — the gap between being taxed on the gain as one £60,000 lump and being taxed on it a slice at a time. Recomputing the PSA at Step 4 (£500 → £1,000) is still the statutorily correct step even though it makes no difference to the FINAL relief figure on this particular case — the calculation-only basic-rate deduction on the slice already floors the relieved liability at £0 either way. On a bigger gain, or where the member has real savings interest competing for the PSA at Step 4, recomputing it CAN move the final figure — carrying the full-gain PSA forward instead is the error to check for first. Run any example end to end — both PSA figures shown — on the top-slicing relief calculator, confirm the gain and slice first on the chargeable event gain calculator, and, signed in, print the five-step working to a compliance-annex PDF. The PSA recalculation for gains from 2021/22 is unpacked in the IPTM3820 explainer.

IPTM3820–3840 (the five steps ; IPTM3820 for the Step-4 savings-allowance recalculation) · ITTOIA 2005 ss.535–537 · FA 2020 s.37 (Step-4 personal-allowance recompute)