What is top slicing relief?

The taxation of investment bonds is unique. Bonds offer investors tax deferral on investment growth until there is a chargeable gain.

However, when a 'chargeable event' does occur, the whole gain will be taxed in that tax year. As a result, more of the gain could be taxed at higher rates than if it had been taxed on an annual basis. 'Top slice relief' attempts to correct this by providing a deduction from the amount of tax due.

This guide explains, with examples, the impact of a chargeable event on the total tax bill, how to calculate the amount of top slice relief, and how much tax there is on the bond itself. It is based on current HMRC guidance.

Calculation basics

These can be broken down into three main steps:

1. Work out the total tax liability before top slice relief (by including the full bond gains)

Before working out the tax, work out the value of allowances to be used in the calculation, specifically the personal allowance, the starting rate band for savings and the personal savings allowance.

Then it is simply a case of taxing income in the right order using unused allowances and the tax bands:

Order of income for tax:

1. Non-savings income (inc. salary, pension, profits from trade, rent)
2. Savings income (inc. interest and offshore bond gains)
3. Dividends
4. Onshore bond gains

2. Work out the amount of top slicing relief

Broadly, this is the difference between the tax paid on the full gain, less the tax paid on the average gain (or 'slices').

There are three additional things to note.

Firstly, the order of income for calculating top slicing relief changes, so that both offshore and onshore bond gains are taxed after all other income.

Secondly, because top slicing is essentially to relieve tax paid at higher rates, an amount known as 'tax treated as paid' is deducted. This applies to both onshore and offshore bonds, and will usually be 20% of the whole gain or average gain (depending on which calculation you are dealing with).

However, if any unused personal allowance is available against the bond gain the tax treated as paid will be 20% of the gain after deducting the personal allowance used against the gain.

Finally, the full gain is used to determine the total tax liability (step 1 in our examples) and the total tax on the full bond gain (step 2a).

The sliced gain is added to total income to determine availability of the personal allowance and personal savings allowance in the calculation of tax on the slice (step 2b).

For gains made prior to  2018/19 the full gain was used to determine eligibility to personal allowance in step 2b of the calculation 'the tax on the slices' . The full gain was also used to determine the amount of personal savings allowance in step 2b, for gains made before 6 April 2021.

3. Deduct the top slice relief from (1) to arrive at the tax due

Having worked out the figure for top slice relief, deduct it from the total liability calculated in step 1 to arrive at the tax due.

Finally, if the bond is onshore, the tax treated as paid figure for the whole gain can also be deducted, but no part of this can be reclaimed from HMRC if it is greater than the tax due. 

Example scenarios

Following these principles, the examples below, based in the 2026/27 tax year, show how top slicing works in different scenarios.