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.
