R05 IP taxation: free practice questions

1. Question 1 of 5

   How are benefits from an individual income protection policy paid for by the individual taxed?

   Option A: As a chargeable gainOption B: At 20% deducted at sourceOption C: Free of income taxOption D: As earned income under PAYE

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   The answer is C: Free of income tax

   Benefits from individual IP policies funded by the individual are generally paid gross and are free of income tax.

   Why the other options are wrong

   A

   IP benefits aren't chargeable gains.

   B

   No tax is deducted at source.

   D

   Individual IP benefit isn't earned income under PAYE.

2. Question 2 of 5

   An employee receives benefit from a group income protection scheme paid for by the employer. How does the employee receive it?

   Option A: As a tax-free lump sumOption B: Net of income tax and NICs under PAYEOption C: Gross, free of all taxOption D: Net of basic rate tax only, with no NICs

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   The answer is B: Net of income tax and NICs under PAYE

   The insurer pays the employer gross. The employer pays the employee through payroll, deducting tax and NICs. The employer can deduct the payment as a business expense, so in effect pays no tax on the claim.

   Why the other options are wrong

   A

   It's paid as regular pay, not a tax-free lump sum.

   C

   Group benefit is taxed as pay, so it isn't gross and tax-free.

   D

   Both income tax and NICs are deducted.

3. Question 3 of 5

   A GP insures against the cost of employing a locum while ill, and claims the premiums as a deductible business expense. How are the benefits treated?

   Option A: Subject to capital gains tax, as a business assetOption B: Tax-free, as for individual IPOption C: Taxable as business receipts, though paid grossOption D: Taxable as employment income under PAYE

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   The answer is C: Taxable as business receipts, though paid gross

   Where premiums are allowed as a business expense, any benefits are taxable as business receipts, although the insurer still pays them gross.

   Why the other options are wrong

   A

   IP benefits aren't subject to capital gains tax.

   B

   Individual IP is tax-free when premiums get no relief; here the premiums are deducted, so benefits are taxed.

   D

   The GP is in business, so the benefits are business receipts rather than PAYE employment income.

4. Question 4 of 5

   Hamid buys extra group IP cover through salary sacrifice. How is this treated for tax?

   Option A: Only the benefit is taxable, as a chargeable gainOption B: The sacrificed salary is tax-free, and the extra benefit is also paid tax-freeOption C: The salary sacrificed is still taxed on him, and claim payments are taxed under PAYEOption D: Neither the salary sacrifice nor the benefit paid has any tax effect at all

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   The answer is C: The salary sacrificed is still taxed on him, and claim payments are taxed under PAYE

   With salary sacrifice, the value sacrificed is taxable on the employee and the resulting claim payments are also taxable through PAYE. Extra cover bought from after-tax income may be paid tax-free, but employers rarely offer this.

   Why the other options are wrong

   A

   The benefit is taxed as income through PAYE, not as a chargeable gain.

   B

   Salary sacrifice doesn't make both sides tax-free; the value sacrificed and the benefit are both taxed.

   D

   Salary sacrifice for extra cover does have tax effects on both the sacrifice and the benefit.

5. Question 5 of 5

   Why do employees not pay tax on the premiums their employer pays for group income protection?

   Option A: Group IP premiums are not treated as a benefit in kind for employeesOption B: The benefits are always tax-freeOption C: The premiums are paid from the employer's registered pension schemeOption D: HMRC treats the premiums as a qualifying policy

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   The answer is A: Group IP premiums are not treated as a benefit in kind for employees

   Employer-paid group IP premiums are not a benefit in kind. Instead, the benefits are taxed when paid to the employee through payroll.

   Why the other options are wrong

   B

   Group IP benefits are taxed when paid to the employee.

   C

   Group IP premiums aren't paid from a pension scheme.

   D

   Qualifying policy rules don't apply to group IP premiums.

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