MTT45430 - Particular entities and adjustments: Insurance: Adjustments where life assurance business carried on
Source: gov.uk (2025-08-05)


Section 152 of Finance (No.2) Act 2023 makes certain adjustments to the underlying profits of an insurance company. It applies to a member that carries on a life assurance business as defined in section 56 FA 2012, or a business regulated as such under the law of another territory outside the United Kingdom.

The life assurance business definition in Section 56 FA 2012 refers to activities that are regulated as contracts of insurance in the UK. These differences in regulatory scope will not necessarily prevent members in other territories from meeting the definition so long as the member is in substance regulated as a life assurance business.

Section 152(3)

A member carrying on a life assurance business may recognise returns that must be contractually paid over to policyholders within its financial statements as income, with a corresponding increase in liabilities due to policyholders. Financial accounting standards generally treat the movement in the corresponding liability as an expense within the profit and loss account. To the extent these amounts are equal and opposite, this will result in a net zero effect on the member’s underlying profits and there will be no overall impact on the company’s effective tax rate (ETR).

Under some financial accounting standards, returns to the policyholders may not be reflected in the member’s profit and loss account and may instead be recognised in another statement such as Other Comprehensive Income. Without a specific provision, these returns would not be included within the member’s underlying profits. As the expense in relation to the movements in the liability to policyholders would be included, there would be a mismatch. This mismatch would distort the underlying profits and mean they are not an appropriate reflection of the profits made by the insurer. Section 152(3) therefore requires an adjustment to reflect the policyholder returns that are recorded in the Other Comprehensive Income in the adjusted profits of the member. This ensures that there is symmetry with the movement in the policyholder liability expense and prevents policyholder income distorting the member’s ETR.

Section 152(2)

A member carrying on a life assurance business can be subject to taxes on returns that are due to policyholders. The member will typically pass that tax onto the policyholder through a recharge and in this way will effectively be reimbursed for taxes suffered on behalf of the policyholder. This recharge will generally be by way of a reduction to the expense in respect of the movement in liabilities to the policyholders and will have the impact of increasing the member’s underlying profits.

This impact will be offset by the expense in relation to the income taxes paid by the insurer in respect of the policyholder returns and therefore overall, the impact on the insurer’s underlying profits will be nil.

However, the tax expense in relation to those policyholder returns is excluded from the member’s underlying profits under Section 138. Without further adjustment, the member’s adjusted profits would be distorted by the inclusion of the recharge for policyholder tax. As the policyholder tax would be excluded from the member’s covered taxes, this would depress the member’s ETR and could result in the insurer incurring a top up tax.

To address this issue, section 152(2) excludes from underlying profits the policyholder liability expense reduction (the recharge). The exclusion will only apply to amounts that would have been included within the member’s covered tax balance had they not been charged to the policyholder. Amounts charged to the member’s policyholders for tax payable by the member may include tax suffered at source such as withholding tax as well as corporation tax.

Section 138 will exclude the associated tax charge on policyholder returns from the underlying profits. The adjustment under s152(2) should generally be equal to the adjustment to the underlying profits for policyholder tax under s138(2)(e).