Life assurance and tax
When you cash in a life assurance policy or bond, the taxable amount you receive is treated as the highest slice of your income. The taxable portion won’t be the full proceeds, but it can increase your marginal tax rate so you pay more tax in one year than you would have if you’d made regular withdrawals over the life of the bond.
Top-slicing relief attempts to put you in the position you would have been in, had the lump sum been paid in equal amounts in each year of the bond’s life. It doesn’t exactly achieve that, but it’s a good approximation.
The problem is, HMRC’s computer hasn’t calculated the top-slicing relief correctly in every case. For example, where the taxable part of the bond pushed your income for the year over £100,000, part or all of your personal allowance is withdrawn. However, in the top slicing relief calculation your Personal Allowance should have been reinstated. It is this step the HMRC computer missed.
A recent tax tribunal case has determined that HMRC was wrong. If you received taxable income from a life assurance bond in the last eight years, or you were an executor of an estate that received income from an offshore bond, ask us to double check the tax due.