Techzone

Example
Jack has a pension of £10,570 and a bond gain of £80,000 made over 8 years. On the full gain calculation, the tax treated as paid will be (£80,000 - £2,000) x 20% = £15,600. On the average gain calculation, it will be (£10,000 - £2,000) x 20% = £1,600. If there had been no unused personal allowance, the tax treated as paid would have been £16,000 and £2,000 respectively.

Example 1 - Full gain plus other income over higher rate threshold, top slice gain plus other income below higher rate threshold

Joe has the following income chargeable to tax:

• Salary = £25,270
• Interest = £500
• Offshore bond gain = £60,000 over 10 years

He will therefore be entitled to the following allowances:

• Personal allowance (PA) of £12,570 (because 'adjusted net income' is below the £100,000 income limit)
• Starting rate band for savings (SRBS) of zero (because non savings income, in this case the salary, is greater than the sum of the PA and £5,000)
• Personal savings allowance (PSA) of £500 (because he has income taxable at the higher rate). However, for the purpose of calculating the tax on the slices in step 2b his income is below the higher rate threshold and will therefore benefit from a PSA of £1,000 in that part of the calculation. 

Step 1 - Total tax liability

Note that although the interest is within the PSA and taxed at 0%, it still uses up part on the basic rate band.

Step 2 - Top slicing relief

Step 2a - Total tax on full bond gain

Step 2b - Tax on the slices, or 'relieved liability'.

The slice is £60,000/10 = £6,000

Top slice relief (2a -2b) = £7,100

Step 3 - Deduct the relief from the full tax liability

From this we can see that the tax paid on the bond only is £4,900 + £14,200 - £7,100 = £12,000.

Top slice relief has effectively wiped out the higher rate liability on the bond gain (i.e. the whole gain taxed at 20% = £12,000).

Had the bond been an onshore bond, tax treated as paid of £12,000 could also have been deducted, and there would have been no further tax to pay on the bond as a result of the chargeable event.

Example 2 - Full gain and top slice gain straddle higher rate threshold

Jess has the following income chargeable to tax:

• Salary = £45,270
• Interest = £200
• Offshore bond gain = £30,000 over 6 years
• Dividends = £2,500

She will therefore be entitled to the following allowances:

• Personal allowance (PA) of £12,570
• Starting rate band for savings (SRBS) of zero
• Personal savings allowance (PSA) of £500
• Dividend allowance of £500   

Step 2 - Top slicing relief

Remember in this step, the order of income changes so that the offshore bond gain is taxed as the highest part of income.

Step 2a - Total tax on full bond gain

Step 2b - Tax on the slices, or 'relieved liability'.

The slice is £30,000/6 = £5,000

Top slice relief (2a -2b) = £2,600

Step 3 - Deduct the relief from the full tax liability

The tax on the bond only is £900 + £10,080 - £2,600 = £8,380.

However, there is another tax consequence where the computation includes offshore bond gains and dividends. The £2,000 dividends in excess of the dividend allowance would have fallen into the basic rate band and taxed at 8.75% if there had been no bond gain. But by including the bond gain, they are pushed into the higher rate, resulting in extra tax of £500 (£675-£175).

Example 3 - Bond gain and sliced gain above the higher rate threshold, and reduced personal allowance

Ava has the following income chargeable to tax:

• Salary = £70,270
• Onshore bond gain = £40,000 over 10 years

She will therefore be entitled to the following allowances:

• Personal allowance (PA) of £7,435 (reduced because income exceeds income limit by £10,270)
• A full personal allowance for calculating the relieved liability in Step 2b (because salary plus the sliced gain totals £74,270 i.e. less than £100,000)
• Starting rate band for savings (SRBS) of zero
• Personal savings allowance (PSA) of £500

Step 1 - Total tax liability

Step 2 - Top slicing relief

Step 2a - Total tax on full bond gain

Step 2b - Tax on the slices, or 'relieved liability'.

The slice is £40,000/10 = £4,000

Top slice relief (2a -2b) = £1,800

Step 3 - Deduct the relief from the full tax liability

The tax on the bond only is £15,800 - £1,800 - £8,000 = £6,000

So, although the whole gain is in the higher rate, the amount of tax is less than might be expected because of the personal savings allowance. Had the PSA not been available to use against the bond, the additional tax would have been £8,000.

* Because the bond is onshore, the tax treated as paid, or notional tax credit, can be deducted from the final liability after the top slice relief.