Step four – Calculate Top Slicing relief due
The Bond gain straddles basic and higher rate tax and therefore Top Slicing Relief is available. A full surrender gain is top sliced back to inception, and so Anna’s gain of £24,000 is divided by eight to give a slice of £3,000. Several months ago HMRC updated its Top Slicing Relief guidance to fall into line with tax law (previously it didn’t!) and this is reflected below.
In the Top Slicing calculation, we initially need to calculate Anna’s liability on the full Bond gain. As you can see above, it is £0 + £220 + £8,960 = £9,180. We now deduct a basic rate credit of £4,800 (£20% x £24,000) which produces a figure of £4,380 for ‘Anna’s liability’. Note for reference that counter-intuitively we deduct a basic rate credit regardless of whether it is an Onshore or Offshore Bond which means that for a given gain and slice then Top Slicing Relief will be identical whether Onshore or Offshore.
We now need to calculate Anna’s liability on just the £3,000 slice as follows.
Her liability on the slice is therefore £0 + £220 + £560 = £780. From this figure we deduct £600 comprising the basic rate credit on the slice (£20% x £3,000). The resultant figure of £180 is multiplied by eight (years) to arrive at a figure of £1,440 representing ‘Anna’s liability on the slice.’
The Top Slicing relief due is calculated by deducting ‘Anna’s liability on the slice’ of £1,440 from ‘Anna’s liability’ of £4,380. Anna is therefore entitled to Top Slicing Relief of £2,940.
Tip
When calculating a tax liability before Top Slicing Relief then the fixed order of tax rules apply. Onshore and Offshore bond gains are slotted in differently in the specified order with Onshore coming after dividends but Offshore before dividends.
When you calculate Top Slicing Relief itself, then Onshore and Offshore bond gains and slices are treated as the ‘highest part’ of income.
Step Five – Summary of Anna’s tax situation
We know from Step three that Anna’s tax liability before Top Slicing Relief was £16,360. If we then deduct Top Slicing Relief of £2,940 then we arrive at a figure of £13,420. That’s not quite the end of the matter as we now need to deduct the onshore bond ‘tax credit’ of £4,800 so that Anna’s overall tax liability is £8,620. This is necessary given that gains on Onshore Bonds are not liable to basic rate tax.
Planning
Anna could enhance the benefits of Top Slicing Relief by making a personal pension contribution in 2019/20 which would extend the basic rate band by the gross contribution. Why is that important? Because, less of the gain and less of the slice will then fall into the higher bracket.
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