Reducing gains via a relief at source contribution

1. Understanding investment bond gains

When there is a gain on an investment bond, the gain is assessed to income tax under chargeable event rules rather than capital gains tax. This means the amount of gain is added to a person’s income.

Onshore bonds include a 20% tax credit representing corporation tax paid within the wrapper. This means basic rate taxpayers will not have any further tax to pay. For clients who fall into higher or additional rate tax, an extra 20% or 25% may still be due.

Offshore bonds are not taxed within the bond so there is no tax credit to offset against the income tax bill.

2. How top slicing relief works

Top slicing relief can reduce the higher or additional rate tax that might otherwise apply to a bond gain. The calculation works by spreading the gain over the number of relevant years to create a ‘slice’. Income tax is then assessed on that slice to determine the relief due.

Relief is generally maximised when as much of the slice as possible falls within the basic rate band, as this limits the amount taxed at higher rates.

3. Extending income tax bands  

Relief at source pension contributions receive:

• Immediate 20% basic rate relief added by the scheme, for example an £8,000 net contribution becomes £10,000 in the pension.
• Further higher or additional rate relief delivered through extended income tax bands.

4. Bringing the planning together

Using top slicing relief with relief at source pension contributions can significantly reduce an individual’s tax bill, and in some cases remove it altogether.

This works by:

• Reducing the gain to an annual amount
• Extending the basic rate tax bands and any tax bands above that

Summary

The total now sits within the extended basic rate band, so no higher‑rate tax is payable on the gain.

By recommending a relief at source pension contribution of £984 net (£1230 gross), clients can avoid a £1,230 tax charge while increasing their pension savings.