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

Critical illness insurance pays a lump sum on diagnosis of a specified condition. When the policyholder themselves pays the premiums personally, the benefit is paid free of both income tax and capital gains tax.

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

Premiums on personal income protection policies are paid from after-tax income and are not tax deductible for the individual. However, benefits are also paid free of income tax.

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 from a personally held income protection policy are paid free of income tax, as the premiums were paid from post-tax income. This is the reciprocal tax treatment — no relief on premiums in, no tax on benefits out.

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

Employer premiums for group income protection (permanent health insurance) are a deductible business expense for corporation tax purposes, reducing the employer's taxable profit.

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

Under employer-held group income protection, benefits are paid to the employer who then pays them to the employee as a continuation of salary. They are therefore subject to income tax and National Insurance contributions.

CII R05 Practice Test

CII R05 Practice Test

CII R05 UK Tax Treatment of Protection Policies