Is Income Protection Insurance a taxable benefit?

If you have an income protection policy, you need to know the answer to a simple question: is income protection insurance a taxable benefit? Well – in short – that depends on who’s paying the premium. Let us explain…

Do you need to pay tax or not?

Nobody likes to think of the unexpected. But if illness or injury forces you off work, it’s reassuring to know that you won’t be left out of pocket. That’s one of the reasons income protection insurance has become so popular. But in the event of any payout, it’s crucial to know what your tax liabilities are. After all, you don’t want money worries when you are trying to focus on your recovery.

Fortunately it’s relatively easy to find out whether you need to pay tax or not.

You pay the premiums yourself

If you pay the premiums for your income protection insurance from your own pocket, then in the eyes of the HMRC your premiums have already been taxed – i.e. the money you used to pay the premiums was taxed automatically when you received your salary. That means any payments you receive from your income protection cover will be yours to do with as you wish – tax free.

Your employer pays the premiums

If you receive income protection cover as a perk from your employer – or if they are paying your policy premiums – then tax will be due on any payout you receive. Your employer can seek corporation tax relief on your premium payments, and any payouts you receive will most likely be taxed via PAYE.

You share the cost of the premiums

What if you and your employer share the cost of your income protection insurance? That’s when things get a little more complicated. Essentially the ratio of tax due will be the same as the ratio of your premium that your employer pays for. Example: let’s imagine your employer pays 75% of the premium, and you pay 25%. In the event of any payout you will pay tax on 75% of the payment.

Make sure you are clear on whether you are contributing to your income protection insurance. You could be making payments towards a monthly or annual premium without even knowing, with the money extracted before you see your payslip. It’s worth asking your employer if you are unsure.

Got any questions?

Then ask us for advice. We take the confusion out of protection, wealth management and retirement planning. Give us a call. It’s free to have an initial consultation with one of our experts. Contact us here.