Permanent Health/Income Protection Insurance
Income protection insurance (IPI) (previously known as permanent health insurance) is designed to provide regular sums to an insured individual in the event that he is unable to work through accident or sickness. The insurance can be taken out by employees or self employed individuals who wish to protect against the costs of being unable to work, and by employers who wish to limit their exposure to the payment of ongoing sick pay.
This blog looks only at the tax implications of the position, not the commercial decision as to whether or not such a policy is necessary.
Sadly, on tax, the implications are different for each type of policy-holder:
- Self employed individuals will not obtain tax relief for the premiums but the benefits payable are not then taxed as trading income.
- Employers that take out a policy and pay the premiums should be able to claim the premiums as a business expense, although possibly not for controlling directors/shareholders. If the policy is for named employees there is a taxable benefit in kind but for group policies for all employees there are no benefit implications. If a claim is made, the proceeds are paid gross to the employer and are normally taxable. The payments made to the employees from the income should be allowed as a business expense, but are taxable under PAYE.
- Employees who take out a private policy obtain no tax relief on the premiums, but importantly the proceeds are not taxable. Where an employer pays the premiums on an employee’s own policy the proceeds are normally tax-free in the hands of the employee. The payment of the premiums is a taxable benefit on the employee and the employer can claim tax relief on the premium.
Really good article
I try and promote incomeprotection but seems to be bottom of peoples priorities at moment
My employer is Jersey based, and whilst working overseas I injured myself making me unfit to work, just after this I was given 30 days notice of redundancy, I continued for the following two years as their employee benefitting from an employers insurance policy. Am I liable for income tax on this sickness benefit paid by my employers insurers. I have since stopped being paid this benefit, as it only ran for a maximum of two years, I am still on the sick, but not claiming any benefits from any source.
David
The general rule is that benefits which you continue to receive after your employment has come to an end are taxable in the year in which you receive those benefits. However, it is possible that the sickness benefit was provided as part of an agreed redundancy package so up to £30,000 may have been exempt from tax.
You also mention that you were working overseas when you had your injury. If you were not resident in the UK for tax purposes and were not taxable here on the earnings from that employment, you may also not be taxable on the two years of sickness benefit provided under your employer's insurance policy.
This is a complicated area. We would suggest that you take specific advice from a specialist tax adviser, as it is easy to make an innocent error and to leave yourself exposed to interest and penalties if the Revenue can argue that you have not taken enough care in completing your tax return.
Thanks
Cathy