Budget 25 Aftermath Extra 2% Chargeable Gains Tax on Insurance Bonds?

We have been pondering this question for a few days now:  Will chargeable gains on life insurance investment bonds be subject to the increased savings tax rates from April 2027?

Savings Income Tax Rate Increases (April 2027)

After savings allowance, i.e., first £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) or £0 (additional rate taxpayers), income from sources like deposits, bank and building society interest is

• Currently taxed at 20%, 40%, 45% but
• Increasing to 22%, 42% and 47% in April 2027
• Savings Tax Rates are set Nationally and not by devolved governments (e.g.  Scotland has different income tax rates).

Life Insurance Bond Taxation Explained

Onshore Life insurance investment funds pay corporation taxes on gains.  This means that when chargeable gains are realised i.e., full or partial cash in i.e., taken by the policyholder, a basic rate tax credit, currently 20%, is given to the chargeable gain taken.

For example, if you invest £100,000 in an onshore bond and it has grown to £150,000 in 10 years and you fully cash it in.

• You have your original capital returned of £100,000.
• Your total gain is £50,000.
• Gain per annum over 10 years (known as the ‘top slice’) is £5,000 pa.
• This £5,000 pa ‘top slice’ is added to your highest rate of income and is taxable.
• Depending upon where the ‘top slice’ sits in tax bands when added to your other income (tax rates 20%/40%/45%), the gain will be taxed at 0%, 20%, 25% after notional 20% tax credit as life fund gains pay corporation tax.
• E.g., the £5,000 ‘top slice’ is all still within your basic rate tax band (20%), the whole £50,000 gain will be taxed at 0% (after notional tax credit of 20%).
• E.g., the £5,000 ‘top slice’ is all within your higher rate tax band (40%), the whole £50,000 gain will be taxed at 20% (after notional tax credit of 20%).
• E.g., the £5,000 ‘top slice’ is all within your additional rate tax band (45%), the whole £50,000 gain will be taxed at 25% (after notional tax credit of 20%).
• E.g., the £5,000 ‘top slice’ has £2,000 within your basic rate tax band (20%) and £3,000 is within your higher rate tax band (40%), £20,000 of the whole gain will be taxed at 0% (after notional tax credit of 20%) and the remaining £30,000 of the whole gain will be taxed at 20% (after notional tax credit of 20%).
• Note, all of the above gains’ taxes are calculated and payable after deduction for savings allowances.

For Offshore Life insurance investment bond gains, chargeable gains are taxed at 20%, 40% and 45% as offshore bond funds do not pay UK corporation tax, so no ‘notional tax credit’ is given.

Will Bond Gains Suffer the 2% Savings Tax Increase in April 2027?

We believe it is possible but the Government may weigh more tax revenue against a real budren of hundreds of thousands of new tax 'headaches'.

Our reason is that life insurance bond gains are offset against the Savings Allowance (currently £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, £0 for additional rate taxpayers).  In addition, if you are on low income, you may also benefit from the additional £5,000 Starting Savings Rate Band of 0% Tax.

Given chargeable gains on insurance bonds can attract Savings Allowance and the Starting Savings Rate tax band (for low income individuals), HMRC clearly considers insurance bond gains as Savings Income and therefore we believe all chargeable gains will be subject the to 2% increase in savings tax rates from April 2027 meaning that

• Any ‘top slice’ gains within your basic rate tax band (20%), the savings tax rate will be 22% meaning the gain will be taxed at 2% (after notional tax credit of 20%).
• Any ‘top slice’ gains within your higher rate tax band (40%), the savings tax rate will be 42% meaning the gain will be taxed at 22% (after notional tax credit of 20%).
• Any ‘top slice’ gains within your additional rate tax band (45%), the savings tax rate will be 47% meaning the gain will be taxed at 27% (after notional tax credit of 20%).

That said, we must wait for the Finance Bill to be published and HMRC’s tax manual/practice notes to be updated when it becomes an Act.

** STOP PRESS ** The Finance (No 2) Bill has now been published.  It confirms that the tax credit for chargeable event gains on UK investment bonds will also increase from 20% to 22% meaning that the amount of tax paid on UK/onshore insurance bonds gains will remain at 0%, 20% and 25% (basic, higher and additional rate taxpayers) BUT for offshore bond gains will increase by 2% to 22%, 42% and 47% respectively.

See Ins Bond Tax Credits

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