Top Slicing interaction with pension contributions

Taxfiler and HMRC are both reducing top slice relief for the pension contribution relief

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Hello all

Has anyone had any experience of this ... 24/25 tax return, client has onshore and offshore chargeable event gains pushing them into the additional rate tax band.  The client has made pension contributions in the year.

I prepared the tax calculation without the pension contribution and the top slice relief was nearly £46k.  When I include the pension contribution the top slice relief is reduced to £42,700 leaving the income tax due as the same figure as before entering the pension contribution.  The calculation is the same on Taxfiler and HMRC's online tax return.

Surely this can't be right?  The client does not receive any higher rate relief on their pension contribution?

Thanks

Replies (8)

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By janelm
03rd May 2024 13:04

I did a lot of work on trying to understand the top slice relief available on an offshore chargeable event last year. I made a spreadsheet of the relief available at many different earnings levels, with figures from my tax software, double checking them to a downloadable calculator 'use at your own risk' from a financial service provider, and at least followed through and understood the detailed calculation steps in my tax software, though didn't quite manage to calculate myself from scratch.

My conclusions were, that the top slice relief was optimal at a total income level of ~79,260 (base scenario 12.5k salary, bond encashment and dividend). The top slice relief dropped off very quickly at any higher rate of income. It would only relieve higher rate tax, i.e. no top slice relief available if total income was under 50,270. Thus, following my calculations, it allowed my client to draw extra dividends from his company that year, to maximise the top slicing relief available.

Thus, I suspect in your case, it might be that the pension contribution is trying to relieve 'the same' portion of higher rate tax as the 'top slice' relief is trying to relieve, and/or there is insufficient higher rate tax paid for the pension contribution to have any further affect.

Thanks (1)
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By richard thomas
05th May 2024 11:48

I am making the assumptions that 24/25 is a typo for 23/24, and that without the gains the client’s marginal rate would be the basic or higher rate, not the additional rate.

I do not understand why you thought it necessary or relevant to calculate the TSR without taking the pension relief into account. The reliefs enter the calculation of TL-BRL in s 535(3) ITTOIA, the liability for the tax year and I see no reason why they wouldn’t enter the section 537 calculation of “relieved liability”.

The only possible argument against them not applying would be the application of s 535(8)(b), but that would not seem to be applicable to the specific and unusual case of relief for deductions of pension contributions at source, extending the basic rate band by the gross contribution, thus giving relief at higher and additional but not basic rates. Is this what you had in mind?

Could you share your calculations with us?

Thanks (1)
Replying to richard thomas:
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By TickTock
07th May 2024 12:02

Thanks Richard

PAYE income £14,275 (two jobs, no PAYE deducted)
Offshore bond £197,022
Onshore bond £27,702

Basic rate @ 20% on £14,275 + £23,425 (£37,700) = £7,540
Higher rate @ 40% on £87,440 = £34,976
Addnl rate@ 45% on £113,859 = £51,236

Less: top slicing relief £45,953
Less: notional tax £5,540

Income tax due £42,259

With the £13,100 gross pension contribution the calculation is:
Basic rate £14,275 + £36,525 = £10,160
Higher rate £87,440 = £34,976
Addnl rate £100,759 = £45,341

The top slicing relief is then £42,677 and the income tax due £42,259

I can see the pension relief in the second calculation and I think I understand why the top slicing relief has been adjusted thanks to the comments on here so far.

I have done both calculations because the IFAs told the client to pay the pension contribution to recoup the loss of her personal allowance - however, the net result is still the same whether she paid the pension contribution or not ..... I will need to explain this to both the client and the IFA.

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Replying to TickTock:
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By More unearned luck
10th May 2024 13:38

Perhaps it would be helpful to state the number of complete policy years that these policies were held for before the event?

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Replying to TickTock:
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By More unearned luck
10th May 2024 13:38

Perhaps it would be helpful to state the number of complete policy years that these policies were held for before the event?

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Replying to More unearned luck:
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By TickTock
10th May 2024 14:55

That would be helpful ... Offshore 12 years, Onshore 9 years

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Replying to TickTock:
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By richard thomas
11th May 2024 17:54

I have no reason to think that the amount of the TSR is not correct, but I don't quite understand why in the calculation of the s 535(3) "liability for a tax year" the BRL item only covers the deemed tax on the UK policy.

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By More unearned luck
06th May 2024 15:04

Is "the same figure as before" the same as the BR tax due on the client's income? If so why should the inclusion of the pension contributi0ns produce further relief?

"The client does not receive any higher rate relief on their pension contribution?"
Yes he does. There is now less HR/AR tax to be relieved by TSR.

Your confusion stems from putting the cart before the horse.

Thanks (1)