Insurance Bond Gains Tax Credit Increased to Offset Savings Tax Increase
Published / Last Updated on 08/12/2025
The Autumn Budget on 26th November 2025, confirmed that the investment income for dividend income, property income and savings income would increase by 2% from April 2026, April 2027 and April 2027 respectively.
Speculation of More Tax on Insurance Bonds
Having ‘mused’ further on the contents of the Budget, we focused on Life Insurance gains and taxation under savings income and issued the following video:
We speculated that as life insurance investment 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 and the fact that all through the Treasury’s Autumn Budget documentation, that insurance bonds are subject to the savings rate of income tax. This would mean that:
- Onshore Bonds Gains (after top slicing – i.e., the gain per annum added to your income), that part of the gain would be taxed at 22%, 42% and 47%, less a basic rate tax credit of 20% (as onshore shore life company funds pay corporation tax), meaning a real tax rate on chargeable gains (after tax credit) of 2%, 22% and 27% (including the 2% increase from 0%, 20% and 25%).
- Offshore Bonds Gains (after top slicing – i.e., the gain per annum added to your income), that part of the gain would be taxed at 22%, 42% and 47%, with no basic rate tax credit of 20% as offshore life company funds do not pay corporation tax, meaning a real tax rate on chargeable gains (after tax credit) of 22%, 42% and 47% (including the 2% increase from 20%, 40% and 45%).
Finance (No 2) Bill
Later on that night, after filming the above video, the Finance (No 2) Bill was published on 4th December, 2025.
After scouring through some 554 pages (offering us some interesting weekend reading), we found on pages 260-264 of the draft Bill some amendments to the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), that some amendments to the 2005 Act would be made to gains under life insurance contracts as follows:
ITTOIA 2005 Section 530 onwards, see https://www.legislation.gov.uk/ukpga/2005/5/section/530, “An individual or trustees who are liable for tax on an amount under this Chapter are treated as having paid income tax at the [F1basic rate] on that amount.”
- Draft Finance (No 2) Bill, on page 260, section 44 amendment “In section 530 (gains from life insurance contracts: income tax treated as paid etc), in subsection (1), for “the basic rate” substitute “the savings basic rate”.
- This means that the Tax Credit for income treated as tax paid is being changed from the current “basic rate” (20%) to the new “savings basic rate” (22%).
- In short, this means that chargeable gains on UK insurance bonds with still be taxed at:
- 0% (22% savings tax less 22% tax credit) for gains within basic rate tax band.
- 20% (42% savings tax less 22% tax credit) for gains within higher rate tax band.
- 25% (47% savings tax less 22% tax credit) for gains within additional rate tax band.
- Therefore, there is no change for UK onshore bonds.
However, Offshore Life Insurance Bonds do not pay UK corporation tax, so there is no tax credit against gains chargeable to income taxes in the UK.
- This means offshore bond gains will be taxed at the new savings rates of income tax that are increasing by 2% to 22%, 42% and 47%, respectively.
Onshore insurance investment bonds may now be more advantageous when compared to offshore insurance bonds given lower tax rates after tax credits. Again, we assume this is another subtle move by the Treasury to encourage more people to invest in the UK rather than offshore.
