These notes are intended to elucidate the treatment of income tax and expenses in the analysis of surplus of a commission-paying office transacting ordinary life assurance and annuity business in the United Kingdom only. The Office is assumed to make an annual valuation for internal purposes, but not necessarily to distribute surplus yearly.

It may first be remarked that the analysis of surplus forms both a check on the accuracy of the valuation and a guide to the amounts and relative importance of the various sources of profit and loss. We are here not concerned directly with the first of these functions and only with two items of the second. It must be realized, however, that the analysis is related to the valuation bases, which may depart materially from the bases underlying the office premiums, particularly at a time when conditions are changing rapidly, or if there is a substantial proportion of very old business on the books.