Should the unexpected happen, it may be that a person needs to make an insurance claim. If you have an insurance policy, then you may wonder whether the pay out will result in you having to pay tax on it. Citizens Advice offers some guidance on the matter. In England, there are some forms of income which are non-taxable, and thus can be ignored for tax purposes.
Citizens Advice says: “You only pay tax on your taxable income so you do not want to include any non-taxable income in your calculations.”
There are a number of types of income which are non-taxable.
The Citizens Advice website states that this includes the interest on withdrawals from insurance policies or investment bonds of up to five per cent of the amount originally invested.
This means that it depends on the size of the interest from the insurance withdrawal, as to whether it counts as a taxable amount.
Citizens Advice also states that insurance benefits if you are sick, disabled, or unemployed, are non-taxable.
It details this as: “Insurance benefits paid to you if you are sick, disabled or unemployed to meet your financial commitments, for example, benefits paid under mortgage protection insurance, permanent health insurance, payment protection (creditor) insurance and long-term care insurance.”
Life insurance pay outs are usually not subject to income or capital gains tax.
However, it may be that the beneficiary or beneficiaries must pay inheritance tax.
The gov.uk website explains that inheritance tax is normally not required to be paid if the total value of your estate is less than the £325,000.
This includes your money, possessions, and property.
The standard inheritance tax rate stands at 40 per cent, and it is only charged on the remaining part of your estate which is above the threshold.
If your life insurance pay out would increase the total value of your estate to a figure beyond the threshold, then inheritance tax would be payable.
However, it your life insurance policy has been written in trust, which is a legally-acknowledged arrangement, then the value of the trust may be exempt from the inheritance tax threshold.
MoneyExpert.com explained: “When you have a life insurance policy, either when you start it or during the policy term, you’ll have the option of doing what is known as writing the policy in trust at no extra cost.
MoneyExpert.com continued: “When you write a life insurance policy in trust, because the payout does not go to your legal estate, its value will not count towards the inheritance tax threshold and so the entire sum will go to who it is intended to go to.”
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