Tax on multiple bond gains
6 April 2024
Key points
- All bond gains in the tax year are aggregated and taxed in accordance with the normal order of income rules
- There is a separate method for calculating top slicing relief where multiple gains with differing top slicing periods arise in the same tax year
- HMRC have revised their guidance on the availability of the personal allowance in calculating of top slice relief for all gains from 2018/19 onwards.
Jump to the following sections of this guide:
Multiple bond gains
Gains in the same tax year will generally be added together to calculate the income tax liability. However, if there is a combination of onshore and offshore gains the order in which they are taxed will differ to reflect that onshore bonds will benefit from 20% a non-reclaimable tax credit for tax paid within the fund. The order of taxation is as follows;
- Non-savings income (inc. salary, pension, profits from trade, rent)
- Savings income (inc. interest and offshore bond gains)
- Dividends
- Onshore bond gains
Top-slicing relief
Top-slicing relief can be used if the total of all gains for the tax year when added to other income is greater than the higher rate tax threshold.
Where a policyholder creates multiple chargeable gains in the same tax year, each with different top slicing periods, the calculation of top slicing relief is slightly different from a single bond gain.
The relief is still the difference between the tax payable on the full gains (the ‘total liability’) and the tax payable on the averaged gains (the ‘relieved liability’).
However, it's not possible to determine the relieved liability by multiplying the tax on the averaged gains by the top slicing period if each bond has been in force for a different period. Instead, the tax on the averaged gains is multiplied by proportion of the aggregate full gains over the aggregate slices. This relieved liability is then deducted from the total liability in the normal way to arrive at the amount of top slicing relief available. This is explained in the example below.
The calculation can be summarised in the following steps:
| Step 4 - Deduct the relief from the full tax liability |
|
| Steps | Method |
|
Step 1 - Calculate the total tax liability |
|
| Step 2 - Calculate top slicing relief (TSR) |
|
| Step 2a - Calculate the 'total liability' on the full bond gains |
|
| Step 2b - Calculate the tax on the aggregate averaged bond gains |
|
| Step 3 - Calculate the top slicing relief |
|
Example - James has a salary of £35,140 for 2024/25. He surrenders two bonds, the first an offshore bond with a chargeable gain of £60,000 which has been held for ten policy years. The second onshore bond has a gain of £30,000 and has been held for two policy years.
James will have no personal allowance to use in any calculations involving full bond gains. This is because his total income, including the full bond gains, is £125,140 (PA is reduced by £1 for every £2 of income over £100,000).
He will however be entitled to the full personal allowance of £12,570 in part 2b because his salary plus the aggregate average gains come to £56,000 (see below).
The £5,000 starting rate for savings is not available because his salary is more than £17,570.
He will, however, still be entitled to a personal savings allowance of £500 in all parts of the calculations because his total income is above the higher rate threshold, but below the £125,140 additional rate threshold
Step 1 - Total tax liability
| Total tax | £36,416 | ||
| Income | Calculation | Tax | |
| Salary | £35,140 | Basic rate @ 20% | £7,028 |
| Offshore bond | £500 | Personal savings allowance @ 0% | £0 |
| Offshore bond | £2,060 | Basic rate @ 20% | £412 |
| Offshore bond | £57,440 | Higher rate @ 40% | £22,976 |
| Onshore bond | £30,000 | Higher rate @ 40% | £12,000 |
| Tax treated as paid | £30,000 @ 20% | (£6,000) | |
Step 2 - Top slicing relief
Remember in this step, the order of income changes so that all bond gains are taxed as the highest part of income.
Step 2a - Total tax on aggregate full bond gains
| Tax on bond (2a) | £17,388 | ||
| Income | Calculation | Tax | |
| Salary | £35,140 | Basic rate @ 20% | N/A |
| Bond gain | £500 | Personal savings allowance @ 0% | £0 |
| Bond gain | £2,060 | Basic rate @ 20% | £412 |
| Bond gain | £87,440 | Higher rate @ 40% | £34,976 |
| Tax treated as paid | £90,000 @ 20% | (£18,000) | |
Step 2b - Tax on the aggregate slices
The slices are:
£60,000/10 = £6,000
£30,000/2 = £15,000
Aggregate slices = £21,000
| Relieved liability (2b) | £1,074 x £90,000 / £21,000 | £4,603 | |
| Income | Calculation | Tax | |
| Salary | £12,570 | Personal allowance @ 0% | N/A |
| Salary | £22,570 | Basic rate @ 20% | N/A |
| Bond gain | £500 | Personal savings allowance @ 0% | £0 |
| Bond gain | £14,630 | Basic rate @ 20% | £2,926 |
| Bond gain | £5,870 | Higher rate @ 40% | £2,348 |
| Tax treated as paid | £21,000 @20% | (£4,200) | |
| Tax on aggregate slices | £1,074 | ||
Step 3 - Calculate the top slicing relief
Top slice relief = (2a - 2b) = £17,388 - £4,603 = £12,785
Step 4 - Deduct the relief from the full tax liability
| The tax on the bond alone is £23,631 - £7,028 (tax on salary) = £16,603 | |||
| Income | Calculation | Tax | |
| Salary | £0 | Personal allowance @ 0% | £0 |
| Salary | £35,140 | Basic rate @ 20% | £7,028 |
| Offshore bond | £500 | Personal savings allowance @ 0% | £0 |
| Offshore bond | £2,060 | Basic rate @ 20% | £412 |
| Offshore bond | £57,440 | Higher rate @ 40% | £22,976 |
| Onshore bond | £30,000 | Higher rate @ 40% | £12,000 |
| Tax treated as paid | £30,000 @20% | (£6,000) | |
| Total Tax | £36,416 | ||
| Top slicing relief | (£12,785) | ||
| Tax due | £23,631 | ||
The Budget 2020 clarified the personal allowance available for top slicing purposes. In the calculation of the relieved liability, i.e. the tax on the slices, it's the individual’s income plus the aggregate of the sliced gains which is used rather than the aggregate full gains where the gains arose after 11 March 2020.
HMRC has now agreed by concession that these changes will now apply to all gains from 2018/19 onwards. Those who submited tax returns 2018/19 or 2019/20 on the old basis will receive a tax adjustment and refund if tax has already been paid.
The availability of the personal savings allowance when calculating the tax on the full gain and the full computation , is however, always based on total income including the full bond gains.
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