Income Tax (Trading and Other Income) Act 2005 section 535

Top slicing relief

Section 535 provides a relief mechanism that reduces or eliminates the higher-rate income tax charge that can arise when a chargeable event gain from a life insurance policy, capital redemption policy or life annuity contract pushes an individual's taxable income into a higher tax band.

• Top slicing relief applies when the full tax on a chargeable event gain exceeds the tax that would be due if the gain were spread evenly over the life of the policy (the "annual equivalent" approach), and is given automatically without the need for a claim.
• The gain is treated as the top slice of the individual's total income, and the tax on it is compared with a relieved liability calculated by reference to a fraction of the gain — the method depending on whether one or more chargeable events arise in the same tax year.
• Certain income is excluded from total income for these purposes, specifically UK property business profits from lease premiums and termination payments counting as employment income, and gains from annual personal portfolio bond calculations are also ignored.
• Gift Aid and charitable donation reliefs are disregarded in the calculation, and personal allowances and other reliefs must be set against non-gain income first before being applied to the gain that is treated as the top slice.