Is Critical Illness Insurance a taxable benefit?

Are you wondering if critical illness insurance is a taxable benefit? By and large it all comes down to who’s paying the premium for your cover: you, your employer or both. Allow us to explain…

What belongs to you and what belongs to HMRC?

Critical illness insurance can bring you some peace of mind if something unexpected happens with your health. But given the large sums of money at stake in the event of a payout, it’s crucial to know what your tax liabilities are. After all, money worries are the last thing you need when you are trying to focus on your health.

You pay the premiums yourself

If you pay the premiums for your critical illness insurance yourself, then in the eyes of the taxman this money has already been taxed (when you received your salary). The upshot: any payouts you receive will be completely free of any tax liabilities. Everything you receive is yours – tax free.

Your employer pays the premiums

If – on the other hand – your employer pays for your critical illness insurance as an employee benefit, then tax will be due on any payout you receive. Your employer can seek corporation tax relief on the cost of paying your premium, and any benefit you receive will be taxed via PAYE.

You share the premiums with your employer

What if you and your employer are sharing the cost of your critical illness insurance? Okay, that’s a little more complicated. Let’s say your employer pays 50% of the premium, and you pay the other half. In the event of any payout you will pay tax on 50% of the payment.

It’s important to be clear on whether you are contributing to your critical illness insurance or not. You could be making contributions without even knowing, with the money extracted before you see your payslip. Talk to your employer if you are unsure.

Any questions?

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