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 (IPTM3820; ITTOIA 2005 ss.535–537): tax the whole gain, then tax a single year's “slice”, and the relief is the gap between the two. 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 the engine's regression figures (corpus row IPTM-EX-03-OFFSHORE), not round illustrations.

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 (for gains on or after 6 April 2021 the PSA and personal allowance are recalculated at this notional level — the rule HMRC confirmed in 2021). 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. 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 still the single most common error to check for. Run any case 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 2021 change is unpacked in the IPTM3820 explainer.

IPTM3820–3840 (the five steps) · ITTOIA 2005 ss.535–537 · HMRC Agent Update 83 (April 2021) (Step-4 PSA/PA recompute)