A: This threshold was introduced in the 2010/11 tax year. The personal allowance reduces where adjusted net income exceeds £100,000, by £1 for every £2 of income above the £100,000 limit.
Q: Is there a minimum that the personal allowance can be reduced to?
A: No, it is possible to wipe it out entirely
How it works
Q: How does it work in practice?
A: Firstly, add the whole gain to the other income to calculate the individual’s adjusted net income. If this is above £100,000, then work out the individual’s reduced personal allowance – it is reduced by £1 for every £2 over the threshold. Adjusted net income of at least £125,140 will wipe out the personal allowance altogether (Tax Year 2021/22).
Next, work out the individual’s higher rate threshold by adding the reduced personal allowance to the basic rate tax threshold. If the personal allowance is reduced, then an individual will reach the higher rate tax band earlier than normal. For example, in the tax year 2021/22, the normal personal allowance is £12,570 and the basic rate threshold is £37,700, therefore a person can earn £50,270 before hitting the higher rate tax band. An individual who has lost all of their personal allowance will have a higher rate threshold of the basic rate band, i.e. £37,700.*
Interaction with top slicing relief
Q: There should be top slicing relief though, shouldn’t there? The top sliced Chargeable Event Gain didn’t breach the £100,000 threshold.
A: When you are looking at the impact of a chargeable event gain on the personal allowance, you need to remember to add the WHOLE (not top sliced) Chargeable Event Gain to the client’s other income to see if the £100,000 threshold has been exceeded. So whilst there may be top slicing relief on the tax due, top slicing cannot be used to reduce the impact on Personal Allowance.
Q: What were the top slicing relief measures announced in the 11 March 2020 Budget?
A: Measures were announced allowing the personal allowance to be reinstated within the calculation for top slicing relief where it has been reduced by reason of including a gain in the individual’s income for the year. For this purpose, the personal allowance is to be calculated by reference to the taxpayer’s other income and the relevant slice. For the avoidance of doubt, the personal allowance is recalculated within Step 4 of the top slicing relief calculation only. The recalculated personal allowance must be set as far as possible against other income (e.g. salary) in preference to the bond gain. This overrides pre-existing rules in tax law allowing reliefs and allowances to be set against income in a way that results in the greatest reduction in a client’s income tax liability.
Previously, where the personal allowance had been reduced, it was that reduced figure which was used in the top slicing calculation.
The measures were included in Finance Bill 2020. The Bill subsequently received Royal Assent and became the Finance Act 2020.
The changes were announced as taking effect from 11 March 2020. This led to questions concerning those with chargeable event gains prior to that date.
On 20 July 2020, HMRC confirmed to the Chartered Institute of Taxation (CIOT) that the mode of calculation as set out in the March Budget will be applied, ‘by concession’, to any gains in both 2018/19 and 2019/20. This was subsequently confirmed in Agent Update 79. Originally, Agent Update 78, indicated that HMRC would only be applying the new provisions to 2019/20 gains.
HMRC started an automatic process to identify any taxpayers who filed in 2018/19 and should have benefited from more of their personal allowance in their Top-Slicing Relief computation. HMRC have said that amendments made will only be favourable to taxpayers although the CIOT understands it is possible this new treatment is not always in the taxpayer’s favour.
Any taxpayer in the same position in 2019/20 need to file a paper return, for HMRC to process manually. From 2020/21, HMRC’s Self-Assessment calculator should produce the right result and returns should not need to be filed manually.
Q: What is the purpose of top slicing relief?
A: Chargeable event gains can mean that a basic rate taxpayer can be pushed into the higher rate band or a higher rate taxpayer can be pushed into the additional rate band. Top slicing relief can assist in reducing the rate of tax charged and minimising the effect of the gain.
When the chargeable event gain does not move a taxpayer into a higher tax rate, there may be still be some top slicing relief available due to the effect of the personal savings allowance nil rate and the starting rate for savings. The amount of these allowances available in the top slicing relief calculation is set by virtue of the taxpayer’s adjusted net income.
For a full surrender of an onshore or offshore bond, always top slice by the number of complete years back to commencement.
Where there is an ‘excess event’ such as a part surrender gain then the rules are more complex.
Effect on Tax Position
Q: Will there be any tax to pay?
A: Although there would be no further tax liability on a Chargeable Event Gain for an onshore bond which is assessed at basic rate, there may still be basic rate tax due. Other forms of income, such as salary within the personal allowance, would no longer be tax free because there is no personal allowance available. This would normally be taxable at basic rate.
Q: My client is a basic rate taxpayer. Will they have higher rate tax to pay if they lose their personal allowance?
A: Perhaps - it depends how much, if any, of the personal allowance is lost and if the top sliced gain takes them into the higher rate tax band.
*For savings income, the UK thresholds apply even if the individual is a Scottish taxpayer