Top-slicing relief after 2021: where HMRC’s own calculator went wrong

Top-slicing relief has a fixed five-step shape (ITTOIA 2005 s.535–537; IPTM3820). The 2021 change did not touch the steps. It changed what happens to two allowances inside them: for gains arising on or after 6 April 2021, the Personal Savings Allowance and the savings starting-rate band are recalculatedat each step's own income level — in particular at Step 4, where income includes only one year's slice of the gain — rather than being fixed once at the taxpayer's actual income and carried through.

The practical effect: a taxpayer who is higher-rate with the whole gain in income (PSA £500) can be basic-rate with only the slice (PSA £1,000). Under the old method the £500 figure was carried into Step 4; under the current method Step 4 gets the recalculated £1,000. More allowance inside the relieved-liability leg means more relief.

The same case, both methods

An offshore bond is fully surrendered in 2025/26: a £60,000 gain over six complete years (slice £10,000), other income £35,000. With the full gain stacked, income is £95,000 — higher rate, PSA £500. With only the slice, notional income is £45,000 — basic rate, PSA £1,000.

Six hundred pounds on a single, unremarkable case — £500 of extra PSA inside the slice computation, worth £100 a year, scaled by N = 6. Larger gains and longer policy terms move more.

IPTM3820 · HMRC Agent Update 83 (April 2021) · ITTOIA 2005 s.535–537

Where the tools went wrong — including HMRC's

The change was announced in HMRC's Agent Update 83 in April 2021 and reflected in IPTM3820. Implementation lagged announcement. HMRC's own online top-slicing calculator continued for a period to return pre-change figures on post-change gains, and a long tail of adviser tooling — downloaded spreadsheet calculators in particular — still carries the Step-3 allowance into Step 4 today. The output of a lagging tool is not slightly stale; it is the answer to a different year's law.

The one-line test for any tool: run a case where the full gain pushes a basic-rate taxpayer into higher rate, and check whether the PSA used in the Step-4 leg is £1,000 or £500. If it is £500, the tool is applying the pre-2021 method and is understating relief on every case with this shape.

The common error underneath

The error is conceptually easy to make: the PSA looks likea fact about the taxpayer (“she is higher-rate, so £500”), when inside top-slicing it is a fact about each step's notional income. The same trap exists for the personal allowance: at Step 4 the PA is recomputed at the notional income level, so a gain that withdraws the PA in the real computation can leave it intact inside the slice computation. Recalculate everything from scratch at each step's own income; carry nothing forward.

Our engine implements the recalculation per IPTM3820 and regression-tests the case above at zero-pence tolerance on every commit. You can run the same case yourself on the top-slicing relief calculator, which prints the Step-3 and Step-4 PSA side by side.

For gains before 6 April 2021 the pre-change method remains correct — the engine branches on gain date.