What your UK tax position costs the portfolio
The same portfolio at the additional rate, the higher rate and the savings rates enacted from 6 April 2027, side by side, with the two ways a policy can be taxed shown beneath.
By Eldar Edmond Grady, CEO, PPLI.com · Research checked 23 September 2026
Tax drag is a cost, and it can be measured
Tax drag is the slowdown in compounding caused by paying tax as income and gains arise rather than at the end. It depends on the character of the return, the turnover and the rate.
With a policy holding permitted property, the annual drag is replaced by one charge at the end: income tax on the chargeable event gain at the holder's rate, eased by top-slicing relief. A personal portfolio bond swaps it for something heavier: tax every year on a deemed gain of 15% of premiums plus earlier deemed gains, whatever the investments did.
Hold the portfolio directly and the drag stays, but so does the freedom to hold anything, to realise losses and to pass the portfolio on death without capital gains tax.
One bond portfolio, four rate positions
£10,000,000 yielding 5% a year, all interest, first year.
Additional rate, 2026/27 5% x 45% = 2.25% 225 bp £225,000
Higher rate, 2026/27 5% x 40% = 2.00% 200 bp £200,000
Additional, from 6 April 2027 5% x 47% = 2.35% 235 bp £235,000
Higher, from 6 April 2027 5% x 42% = 2.10% 210 bp £210,000The 2027 rows use the savings rates enacted in Finance Act 2026 from 6 April 2027. They are law for 2027/28 onwards, not the rates for the current year, so a figure that runs for many years sits between the two sets of rows.
How the rates are applied
Interest and dividends
Each asset class has an income share and a dividend share of that income. Dividends take the dividend rate; the rest of the income takes the savings rate.
Realised gains
Growth is taxed only to the extent turnover realises it, at the CGT rate you set, 24% by default.
Policy rows
The permitted-property row shows no annual drag and the exit rate on encashment. The personal portfolio bond row shows the first-year charge: 15% of the premium taxed at the savings rate.
Common questions
Do Scottish income tax rates apply?
Not to savings or dividend income, and not to chargeable event gains. The UK savings and dividend rates apply to Scottish taxpayers.
Is the 2027 rate the default?
No. The default is 2026/27. The 2027 savings rates are a labelled option.
Instruments and related reading
Encashment and top slicing relief calculatorThe gain when a bond is cashed in or a withdrawal goes over 5%, the tax on it and the reliefOpen →Tax drag calculatorThe annual tax cost, asset class by asset classOpen →Offshore bond break-evenThe year a policy pays for its charges, if it doesOpen →Wealth Intelligence profileOne set of facts, carried into every instrumentOpen →Tax efficiencyHow a non-UK policy is taxed in the hands of a UK residentOpen →Chargeable event gains and top-slicing reliefHow the final gain is calculated and taxedOpen →PPLI.com is not authorised by the Financial Conduct Authority and does not give personal advice. This is general information about UK law, not an invitation or inducement to enter into any insurance or investment contract. Policies issued by insurers outside the UK are not protected by the Financial Services Compensation Scheme (unless written through a UK branch).
The authorities this page relies on
Income tax, savings and dividend rates
Savings rates 20, 40 and 45% in 2026/27. Dividend rates 10.75, 35.75 and 39.35% from 6 April 2026. Savings rates of 22, 42 and 47% from 6 April 2027 (FA 2026 s.5), shown here only as a labelled option. gov.uk, rate changes
ITA 2007 s.18(4)
Chargeable event gains are savings income for an individual, so they sit in the savings bands and are taxed at 20, 40 or 45% in 2026/27. legislation.gov.uk, ITA s.18
Capital gains tax rates
18 and 24% for disposals on or after 30 October 2024. Business Asset Disposal Relief at 18% from 6 April 2026. Annual exempt amount £3,000. gov.uk, CGT rates
Personal portfolio bonds, ITTOIA ss.516, 520 and 522
A policy is a personal portfolio bond if the holder, a connected person or someone acting for them can select the assets outside the permitted categories in s.520. At the end of each insurance year except the last, a deemed gain of 15% of premiums plus earlier deemed gains is taxed, with no top-slicing relief. legislation.gov.uk, s.522
HMRC helpsheet HS321
Gains on foreign life insurance policies do not carry the non-repayable basic-rate credit that UK policies carry, so the whole gain is taxed at the holder's rate. gov.uk, HS321
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