Navigating all the details of income protection insurance can be daunting! If you’re thinking about taking out a Group Income Protection plan for your employees, or are wondering how your current one is affected by tax, we’re here to help.
Let’s explore the tax implications of Group Income Protection insurance, find out whether premiums are tax deductible and understand the key points associated with employer funded cover.
What is Group Income Protection insurance?
Group Income Protection Insurance is an income protection policy, usually taken out by employers on behalf of their employees, to serve as a financial safety net for both parties if an employee was unable to work due to illness or injury. This mutually beneficial policy means that the unwell employee has less worry about money while they’re off sick, and the employer gets the insurer providing an agreed amount of employee salary rather than needing to fund it directly themselves.
There are, however, two different types of Group Income Protection insurance - one paid for by the employer, and one paid for by the employee. These options allow businesses to choose a coverage type that fits their budget, but still offer the attractive benefit to their employees.
Employee funded Group Income Protection allows companies to create a plan for their employees, based on a group insurance model and pricing. Whether an employee decides to take out a plan is completely up to them and they choose the benefits they want.
Is income protection taxable?
Hopefully you never have to use this kind of insurance, but if you do, you may be wondering whether or not income protection is tax deductible. Well, it depends on the circumstances and who pays the premium.
Is income protection taxed if employees pay the insurance premiums themselves?
If your employee is paying for their income protection insurance themself, there is (under current tax rules) no tax liability on a claim payout. This is because they are paying their premium using money that is already taxed - either through self-assessment or as part of their net salary.
Is income protection taxable if the employer pays for employee’s cover?
Employers can offer income protection as an employee benefit. If you pay for your employees’ cover, tax is due on any claim payout. Payouts will be sent directly to you and your employee will then receive the post-tax payout through the normal PAYE process.
Are Group Income Protection insurance payments tax deductible?
As we’ve already mentioned, Group Income Protection acts as a safety net for both employers and employees alike, providing financial support in the event of absence due to illness or injury. As an employer, it allows you to effectively manage extended periods of employee absence whilst helping towards your legal and financial obligations and your own sickness scheme financial liability . As an employee benefit, it can also help attract and retain staff in an increasingly competitive job market!
Group Income Protection premiums paid for by the employer are normally treated as a deductible business expense. Benefit received under a claim is classed as business income and is taxable and when paid under PAYE to an employee is a trading expense, hence tax neutral. (Based on current legislation and HMRC practice.)
Want to know more?
As an experienced product provider, Wiltshire Friendly is here to help you with all aspects of income protection. If you would like a chat with us to understand more please get in touch. We are here to help!