CII R05 UK Tax Treatment of Protection Policies

Question 1

How is the lump sum payout from a personally held critical illness policy taxed in the UK?

Accepted Answer

It is paid free of income tax and capital gains tax

Answer

It is subject to income tax

Answer

It is subject to capital gains tax

Answer

It is subject to inheritance tax if the policyholder dies within seven years

Question 2

Under what circumstances are premiums paid on a personal income protection policy tax deductible?

Accepted Answer

Never — personal income protection premiums are not tax deductible

Answer

Always, as protection is a necessary personal expense

Answer

When the policy is written in trust

Answer

Only if the policy has been in force for more than five years

Question 3

How are benefits from a personally held income protection (permanent health insurance) policy taxed when paid to the policyholder?

Accepted Answer

Benefits are paid free of income tax

Answer

Benefits are taxable as earned income

Answer

Benefits are subject to National Insurance contributions

Answer

Benefits are subject to a 20% flat rate tax

Question 4

An employer pays premiums on a group income protection policy for employees. How are these premiums treated for the employer?

Accepted Answer

They are a deductible business expense for the employer

Answer

They are a disallowable expense for corporation tax

Answer

They are treated as a P11D benefit in kind for employees

Answer

They must be paid through the PAYE system

Question 5

Under a group income protection scheme where the employer is the policyholder, how are benefits paid to employees taxed?

Accepted Answer

Benefits are paid to the employer and then paid as salary, subject to income tax and National Insurance

Answer

Benefits are paid free of all tax

Answer

Benefits are paid directly to employees free of National Insurance but subject to income tax

Answer

Benefits are taxed only if they exceed £30,000

Question 6

A key person life assurance policy is taken out by a company on a key employee. In what circumstances would the premiums be deductible for corporation tax?

Accepted Answer

When the policy is for pure protection (not investment), the benefit would be taxable in the company, and there is no element of permanent endowment

Answer

Always, as a key person is essential to the business

Answer

Never, as life assurance premiums are always disallowable

Answer

When the policy is written in trust for the employee's family