Briefing Notes Chargeable Gains Rate Bands 680 392

Chargeable gains, the SRSB and PSA briefing note

Learn how chargeable gains are set against the starting rate band and the personal savings allowance.

For the tax year 2020/21, there is a 0% personal savings allowance of up to £1,000 in addition to the £12,500 personal allowance and the £5,000 starting rate band.

When looking at an individual’s tax position, non-savings income such as income from employment, rental income and pension income, is taxed first. Therefore, the personal allowance is set against non-savings income first, followed by savings and dividend income applied in the most beneficial way for the taxpayer. Chargeable gains from both international and UK bonds are treated as “savings income”. However, chargeable gains from a UK bond carry a 20% tax credit.

How will the personal allowance, starting rate band and personal savings allowance affect the taxation of chargeable event gains on both international and UK bonds?

2020/21

Personal Allowance £12,500* taxed at 0%
up to £37,500 taxed at 20%
£37,500 to £150,000 taxed at 40%
Income over £150,000 taxed at 45%
Starting rate band for savings income £5,000 – taxed at 0% if an individual’s non-savings income does not exceed £17,500.
Personal Savings Allowance**  
£1,000 (basic rate taxpayer)  
£500 (higher rate taxpayer)  
£0 (additional taxpayer)  

* for every £2 of income over £100,000 the personal allowance is reduced by £1. Within the top-slicing calculation personal allowance entitlement is calculated
by reference to the top-sliced gain.
** When calculating entitlement to personal savings allowance it is the total chargeable gain and not the top-sliced gain that is used.

 

The following examples all assume that the policyholder has no other savings income and no dividend income.

(1) UK International
No non-savings income
Chargeable gain = £17,500
Chargeable gain
£12,500 @ 0% = 0
£5,000 @ 0% = 0
Chargeable gain
£12,500 @ 0% = 0
£5,000 @ 0% = 0
  No tax to pay and tax credit
cannot be reclaimed
No tax to pay
(2) UK International
Non-savings income £15,000
Chargeable gain = £30,000
Non-savings income
£12,500 @ 0% = 0
£2,500 @ 20% = £500
Chargeable gain
£2,5001 @ 0% = 0
£1,0002 @ 0% = 0
£26,500 @ 20% = £5,300
Total tax on gain = £5,300
Less tax credit £6,000 (£30,000 @ 20%)
Restricted to actual tax payable3 £5,300
Non-savings income
£12,500 @ 0% = 0
£2,500 @ 20% = £500
Chargeable gain
£2,5001 @ 0% = 0
£1,0002 @ 0% = 0
£26,500 @ 20% = £5,300
  Total tax payable = £500 Total tax payable = £5,800

1 As the non-savings income is £15,000 the starting rate band is restricted to £2,500
2 personal savings allowance
3 The tax credit is deducted from the total tax liability; however it is restricted to the amount of tax actually payable

(3) UK International
Non-savings income £20,000*
Chargeable gain £30,000
Non-savings income
£12,500 @ 0% = 0
£7,500 @ 20% = £1,500
Chargeable gain
£1,000 @ 0% = 0
£29,000 @ 20% = £5,800
Total tax on gain = £5,800
Less tax credit £6,000 (£30,000 @ 20%)
Restricted to actual tax payable £5,800
Non-savings income
£12,500 @ 0% = 0
£7,500 @ 20% = £1,500
Chargeable gain
£1,000 @ 0% = 0
£29,000 @ 20% = £5,800
  Total tax payable = £1,500 Total tax payable = £7,300

* As the non-savings income exceeds the personal allowance plus the starting rate band, the starting rate band is unavailable

(4) UK International
Non-savings income £30,000
Chargeable gain £30,000
Bond held over 3 years
Non-savings income
£12,500 @ 0% = 0
£17,500 @ 20% = £3,500
Chargeable gain
£500* @ 0% = 0
£19,500 @ 20% = £3,900
£10,000 @ 40% = £4,000
Total tax on gain = £7,900
Less tax credit £6,000 (£30,000 @ 20%)
Total tax on gain = £1,900
Total tax payable =
£3,500 + £1,900 =£5,400
Non-savings income
£12,500 @ 0% = 0
£17,500 @ 20% = £3,500
Chargeable gain
£500* @ 0% = 0
£19,500 @ 20% = £3,900
£10,000 @ 40% = £4,000
Total tax on gain = £7,900
Total tax payable =
£3,500 + £7,900 = £11,400
  Top slicing relief
Tax due on gain = £7,900
Less tax credit £6,000 (£30,000 @ 20%)
Total tax on gain = £1,900
Top sliced gain = £30,000/3 = £10,000
£500* @ 0% = £0
£9,500 @ 20% = £1,900
Less tax credit £2,000 (£10,000 @ 20%)
Restricted to actual tax payable £1,900 = £0
£0 x 3 years = £0
Top slicing relief
£1,900 - £0 = £1,900
  Total tax payable after top slicing=
£5,400 - £1,900 = £3,500
Total tax payable after
top slicing =
£11,400 - £1,900 = £9,500

* As the total income is in the higher rate tax bracket the personal savings allowance is reduced to £500

(5) UK International
Non-savings income £40,000
Chargeable gain £60,000
Bond held over 3 years
Non-savings income
£12,500 @ 0% = 0
£27,500 @ 20% = £5,500
Chargeable gain
£500 @ 0% = 0
£9,500 @ 20% = £1,900
£50,000 @ 40% =£20,000
£21,900
Less tax credit £12,000 (£60,000 @ 20%)
Total tax on gain = £9,900
Total tax payable =
£5,500 + £9,900 =£15,400
Non-savings income
£12,500 @ 0% = 0
£27,500 @ 20% = £5,500
Chargeable gain
£500 @ 0% = 0
£9,500 @ 20% = £1,900
£50,000 @ 40% = £20,000
£21,900
Total tax on gain = £21,900
Total tax payable =
£21,900 + £5,500 = £27,400
  Top slicing relief
Tax due on gain = £21,900
Less tax credit £12,000 (£60,000 @ 20%)
Total tax on gain = £9,900
Top sliced gain = £60,000/3=£20,000
£500 @ 0% = £0
£9,500 @ 20% = £1,900
£10,000 @ 40% = £4,000
Less tax credit £4,000 (£20,000 @ 20%) = £1,900
£1,900 x 3 years = £5,700
Top slicing relief
£9,900 - £5,700 = £4,200
  Total tax payable after top slicing =
£15,400 - £4,200 = £11,200
Total tax payable after
top slicing =
£27,400 - £4,200 = £23,200

This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at May 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.