UK Saving products taxation

[Rahul]

This question is in context of the UK regime for life assurance saving product.
This topic is stated in second chapter of taxation on Pg4.

Let us consider a non qualifying saving assurance product:
Premium paid: 1000
Investment income: 300
Benefit payment:1500
Expense:0 (For ease of the example considering to be 0)
Policyholder marginal rate is 20%.

Core reading says:
Investment earning tax is applied on 300(1300-1000, This is investment earnings) that would be 60.
Benefits would be taxed on 500(1500-1000,Benefit payment above the premiums paid) that would be 100.
Total tax amount for Po would be 160.

Here we can see that the investment earnings has been taxed twice once under the investment earning and secondly under the benefits payment.
As per my understanding the total tax should have been 60 + 40(Benefit taxed on 200, benefit payment above premium and investment earnings).

Could you please help me to understand that why there is a disconnect and why is it like we are double taxing the investment earnings?

Thank you in Advance

 

[Lindsay Smitherman]

I haven't looked at these calculations in detail, but a few observations:

• In the example figures, the company appears to be making a significant loss on this business, which is likely to be confusing the numbers. If the premium is 1000 and investment earnings have been 300, how can the insurer afford to pay a benefit of 1500? This suggests a loss to the insurer of 200. More realistically, the benefit payment would be say 1300 (if a mutual, so no profit made) or 1250 say if a proprietary (making a profit - which would then be taxed through the minimum profits test process).
• Assuming this is a mutual (or, if it is a proprietary, that minimum profit = 0), I-E would be taxed within the insurance company at the basic rate of income tax (20% for the UK)
• The p/h would only be taxed (on the excess of benefits received over premiums paid) at the excess of their marginal rate over the basic rate of tax, which would mean being taxed at 0% in this example as they are a basic rate taxpayer (ie no tax due)
• So there is no double taxation