When you cash in a life insurance bond or certain investment policies, you might face something called a “chargeable event gain.” This is the profit built up inside the policy, which HMRC treats as income in the year you cash it in.
The problem? The whole gain is added to your income for that year, which can make it look as though you’ve suddenly had a big jump in earnings — and that can push you into higher tax rates.
To make things fairer, HMRC introduced something called top slicing relief.
What is Top Slicing Relief?
Imagine you’ve had a policy for 15 years and your gain is £45,000. Instead of treating the whole £45,000 as though you earned it all in one year, HMRC allows you to “slice” it:
- £45,000 ÷ 15 years = £3,000 per year.
- They then ask: if you’d earned an extra £3,000 every year, what tax band would that fall into?
- If the slice would have fallen into a lower tax band (20% or 40%), you get relief, which reduces the tax you pay overall.
When Top Slicing Relief Helps
Top slicing relief can make a big difference if:
- The gain pushes you from the basic rate band (20%) into higher rate (40%), or
- It pushes you from higher rate (40%) into additional rate (45%).
In those cases, the relief can pull your effective tax rate back down, because the slices are tested against your usual income.
When Top Slicing Relief Doesn’t Help
Here’s the catch:
- If your normal income is already high enough to put you in the additional rate band (above £125,140 in 2023/24), then even a small slice of the gain will still be taxed at 45%.
- That means spreading the gain out doesn’t change anything — the slices are still taxed at the top rate.
- In this situation, top slicing relief provides no benefit.
Key Takeaway
Top slicing relief is designed to protect taxpayers from being unfairly pushed into higher bands by a one-off gain. But it only works if your normal income is within or close to those lower bands. If you’re already an additional rate taxpayer, the relief simply doesn’t apply.
💡 Tip: Before cashing in a policy, it’s always worth getting advice. Sometimes, careful timing or spreading encashments over more than one tax year can reduce the overall tax bill.
Need Advice?
If you’re thinking about cashing in an investment policy, or you’ve been told you might be affected by a “chargeable event gain,” speak to us at DNA Accountants. We’ll help you understand the rules, check whether top slicing relief could apply, and make sure you don’t pay more tax than necessary.