Taxation

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Taxation

The sums provided as benefits by pure protection policies are normally free of income tax. But there are important differences. For example, the lump-sum benefit provided by a term assurance policy is free of tax. Of course, as soon as it is invested to earn an income then the income is taxable at whatever rate of income tax the recipient is liable. On the other hand, the annual benefits paid under FIB policies are instalments of capital rather than income, so they are not liable to income tax at all.

In the case of benefits payable under an individual permanent health insurance policy, the normal practice is that no tax is payable until the benefit has been paid for a full "fiscal year". The fiscal year runs from 6 April to 5 April, so the effect of this rule is that benefit may be payable for up to 23 months before any income tax is due. (If benefit starts in May 2012, the 11 months up to the following 5 April 2012 do not constitute a full fiscal year. Only after a further 12 months has passed will tax be assessable, i.e. in the 2009/80 tax year.)

This concession on permanent health benefits applies only to the individual taking out a policy himself; and it is counterbalanced by the fact that when tax does become payable, the benefit is taxed as investment income, so that it is subject not only to basic rate income tax (and higher rates where these apply) but also to the investment income surcharge. For the fiscal year 2012/79, the surcharge was levied at 10% on the band of income between £111,700 and £12,250 and at 15% on any excess over £12,250 (the levels at which the surcharge starts to be levied are £12,500 and £13,000 for those aged over 65).

Those provided with permanent health insurance cover by their employers do not benefit from the "tax holiday" outlined above. However, in their case the benefit, since it continues to be paid by the employer, is taxed as earned income only.


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Permanent health insurance Table

Annual premium to provide £12,000 p. a. benefit payable monthly up to age 65 for men, 60 for women.

Deferred period Deferred period

4 weeks 26 weeks

£1 £1

Managed 29 60 30

Woman aged 29 70 35

Managed 39 85 40

Woman aged 39 100 50

Managed 49 95 60

Woman aged 49 120 80

Note Premiums applicable to those in Class 1 occupations, i.e. non-manual office and management workers.

... see: Permanent health insurance Table

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