AIBU to ask a very boring tax question?

[Chocolatefrogs]

I’m a basic rate tax payer, and my salary gets taxed at source, so I don’t fill out tax returns currently.

However, I recently took out some money from a bond that I’ve had for over 20 years, which I’ll need to pay tax on and will also need to fill out a tax return.

I’m hoping to work out how much tax I’ll need to pay on the bond. I’ll contact HMRC to ask about this, but I also wanted to do my own calculation, to work it out myself. I’ve seen lots of different and complex advice on tax calculations online (all aimed at accountants and financial advisers, of which I am neither!)

Is there a straightforward way to work out how much tax I’ll need to pay on the bond gain? Thanks.

The most straightforward calculation I’ve seen so far is this one: https://static.aviva.io/content/dam/document-library/adviser/ecm/in13136c.pdf.

It says that basic rate tax payers can use ‘top slice tax relief’ if the gain they’ve made on their bond pushes them from the basic rate tax band to the higher rate tax band.

To calculate top slice tax relief, the link says to divide the total chargeable gain by the number of full years you have had the bond for, to find the ‘slice’ of the gain. It says that this ‘slice’ is then added to the total income, to decide if you stay in the basic rate band or go up into the higher rate band.

I’ve found the info on this link much simpler than other top slice tax relief calculations I’ve seen. Is this it, or is there more to the calculation than this?

Thanks!

Will it tip you into the higher tax bracket?

Yeah it will - if I add the total chargeable gain to my current salary, that will put me quite a bit in the higher tax bracket.

To give an example with very similar, but not exact, figures: my salary is £30k and the gain is £70k, and that would give me a total income for the tax year of £100k and would put me in the higher tax bracket.

Can you cash in half the bond this tax year and half in April so the new tax year?

Unfortunately I’ve already cashed it in, as I’ll need it for a house purchase.

I had thought about cashing it in gradually over a couple of tax years, but ultimately I thought it best to cash in the full amount this tax year, as I’m hoping to buy a place this year and will need it for a house deposit.

Also, I’m not sure what my salary will be next tax year and whether it will be in the next tax bracket, as my current salary is quite close to the top of the basic rate tax band.

My understanding was that, ultimately, I would be liable for less tax if I pay basic rate tax and cash in the bond, rather than cashing it in future, when my salary could be in the next tax bracket.

Is anyone able to advise on the top slicing tax relief bit please?

Is the £70K the increased value of the bond over your original investment?

Yeah it is, it’s the amount the bond has increased by since it was invested.

It might be worth you spending a little time with an accountant, they will be able to advise you properly; or try to contact HMRC, not so easy these days I've heard.

Thanks - I’ve tried contacting HMRC but keep on getting put on hold for ages and then the call ends. I’ll try contacting them again tomorrow.

This calculator tool might be helpful

https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=www.quilter.com/siteassets/documents/platform/tools/chargeable-event-gains-income-tax-calculator-gain-for-top-slicing.xlsx&ved=2ahUKEwjOp-D0yJWFAxVKQEEAHW2JBowQFnoECB0QAQ&usg=AOvVaw0aa2wRqxjr03amLcralS3R

I second spending some time with an accountant.

I used to calculate this for people frequently but it’s been quite a few years since I’ve had to and the tax system has changed since.

You also need to watch out for any interaction with benefits.

This is really helpful - thanks.