How top-slicing relief treats the savings allowances, before and after 2021/22

Top-slicing relief stops a bond gain being taxed as though the whole amount landed in a single year, when in substance it built up across the life of the policy. The relief follows a fixed five-step shape — grounded in ITTOIA 2005 s.535–537 and walked through numbered in HMRC's manual at IPTM3840 — and the arithmetic of those steps hasn't changed. What differs for gains from 2021/22 is one input that flows through two of the steps: the Personal Savings Allowance.

For gains arising on or after 6 April 2021, HMRC's manual at IPTM3820 has the Personal Savings Allowance (and, where relevant, the starting rate for savings band) recalculated at the notional income level used inside the relief computation — not fixed once at the client's actual income and carried through. On the wrong side of a rate boundary, that recalculation can move the relief on a single bond by hundreds of pounds.

The rule

Walk the five steps as HMRC numbers them at IPTM3840. Step 1 works out total taxable income for the year including the full gain, and identifies how much of the gain falls in each band. Step 2 takes the tax due on the gain across those bands, deducts basic-rate tax treated as paid, and gives the total liability. Step 3 divides the gain by the number of complete years, N, to get the annual equivalent. Step 4 computes the liability on that annual equivalent, deducts basic-rate tax treated as paid on it, and multiplies by N — the total relieved liability. Step 5 deducts Step 4 from Step 2, and the remainder is the relief.

The Personal Savings Allowance depends on which tax band the individual falls into: £1,000 for a basic-rate taxpayer, £500 for a higher-rate taxpayer, nil for an additional-rate taxpayer. It is used twice, at two different income levels, and the two need not agree. On the full gain — the Step-1/Step-2 side — the whole amount is in income, which can push the taxpayer into additional rate and fix the allowance at nil. On the annual equivalent at Step 4, only one year's slice is in income, which can leave the same taxpayer in a lower band, where the allowance is £500 or £1,000. IPTM3820 asks you to use the band that applies at each step's own income level, recalculating it rather than carrying the full-gain figure through.

ParaplanAI's compliance annex prints the two allowances side by side as the “full-gain calculation (Step 1)” and the “notional slice (Step 4)”, following HMRC's numbering. Step 3 is the annual equivalent of the gain.

A worked example

Take an offshore bond, large enough that the full gain pushes the member into additional rate at Step 1 while the sliced gain sits in higher rate at Step 4 — the PSA moves from nil to £500 between the two steps. Offshore bonds also carry a basic-rate “deemed tax paid” credit within the relief calculation (ITTOIA 2005 s.531(1) — the same s.530 credit onshore bonds get), but that credit is a separate, parallel mechanism: it reduces both steps by the same restricted amount and does not cancel out the PSA-recalc's own effect.

An offshore bond is fully surrendered in 2025/26. The gain before any TAR is £90,000, built up over six complete years, so the annual equivalent — the slice — is £15,000, and there's £45,000 of other income. Stack the full £90,000 gain before any TAR on top and total income is £135,000 — above the £125,140 additional-rate threshold, so the PSA on the full gain is nil. Stack only the £15,000 slice on top and the notional income is £60,000 — higher rate, so the PSA on the annual equivalent is £500.

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.

Compute the same case the old way — carrying the Step-1 PSA of nil into Step 4 instead of recalculating it to £500 — and the relieved liability rises to £11,676 and the relief falls to £6,817. Same bond, same gain, same other income; a £600 swing that comes entirely from which PSA you use at Step 4 (the s.531(1) deemed-tax credit is identical either way, so it drops out of the comparison).

Offshore and onshore bonds now run the same relief-calculation credit mechanism — the deemed-tax credit no longer masks the PSA-recalc's effect on offshore any more than it does on onshore. Whether the recalc moves the final figure on a given case depends on whether the credit already floors the relieved liability at £0 regardless of which PSA is used, or whether, as here, genuine tax remains due after the credit on both sides of the comparison, in which case the PSA swing shows up in full.

The common error

The mistake is structural, not arithmetic. Applied to a gain arising in 2021/22 or later, a calculation built on the pre-2021 method — or on IPTM3820 as it read before HMRC's 2023 rewrite, which said these allowances were not adjusted for the sliced gain (see the citation below) — computes the PSA once, from the taxpayer's banding with the full gain included, and then reuses that single figure at every step. It never asks the question IPTM3820 forces: what band is the taxpayer in when only the slice is counted? Where the full gain crosses a rate boundary that the slice doesn't, the carried-forward PSA is too small at Step 4, the relieved liability is too high, and the relief is understated unless the basic-rate credit already covers the tax on the slice.

It is also a quiet error, because it produces a plausible number that won't trip a sense-check: the relief is still positive and still in the right order of magnitude. The only way to catch it is to recalculate the allowance at each step, or to test against an HMRC-grounded case where the divergence is visible.

ParaplanAI computes the PSA from scratch at each step — a pure (income, config) → allowance call invoked independently for the full gain and for the slice, with no carry-over. Both step-level PSA figures are shown on the compliance annex so the working is inspectable.

The citation

The steps of the relief are set by ITTOIA 2005 s.535–537; in HMRC's Insurance Policyholder Taxation Manual, IPTM3820 (“Top slicing relief: general”) signposts them and IPTM3840 walks them through numbered (worked end to end in how to calculate top-slicing relief). The recalculation of the Personal Savings Allowance at the notional income level, for gains on or after 6 April 2021, is set out in IPTM3820, in the form HMRC's manual has taken since a 2023 rewrite; before that the page said these allowances were not adjusted for the sliced gain, so a method built on the earlier guidance carries the full-gain figure through. It sits alongside the reinstatement of the personal allowance in the top-slicing calculation under FA 2020 s.37, which followed the First-tier Tribunal decision in Silver v HMRC. The underlying allowance figures (£1,000 / £500 / nil by band) are in the savings-allowance provisions of ITA 2007.

IPTM3820 · IPTM3840 (the five steps) · FA 2020 s.37 · ITA 2007 ss.12A–12B (savings nil rate and savings allowance)

Want to run the case yourself? Enter a £90,000 gain before any TAR, six years and £45,000 of other income in the free top-slicing relief calculator, which prints the two PSA figures side by side. The calculator opens on a smaller £60,000 offshore case, which is published in full, with its expected figures, on the trust page.