June 5th, 2020

Is critical illness insurance a taxable benefit?

You have a simple question: is critical illness insurance a taxable benefit? The last thing you want is an unexpected bill from the taxman. So here’s the short answer: it all depends on who’s paying for your cover: you, your employer or a mix of both. Come and find out more…

What are the tax implications of a critical illness payout?

Critical illness insurance is designed to bring you some financial security if your health takes an unexpected turn. But given the large sums of money involved in any successful claim, it’s best to be clear on the tax implications. That way you can concentrate on your health, rather than getting into a mix up with the taxman.

So in the event of a payout, what belongs to you and what belongs to HRMC?

If you pay for the cover yourself…

When you are paying for your own critical illness insurance, any payout you receive will be completely free of any tax liabilities. In the eyes of HMRC, the payout is yours tax-free because the money you used to pay for the cover – i.e. your salary – will already have been taxed before you received your payslip. In a nutshell: if you pay for your cover yourself, you won’t have to pay any tax on a successful claim.

If your employer pays for cover on your behalf…

On the other hand, your employer may be paying for critical illness insurance on your behalf. If that’s the case, any payout you receive in the event of a successful claim will be taxed via PAYE – just like your salary is. That’s because your employer can claim tax relief on the cost of paying for your cover.

If you share the cost of the cover with your employer…  

Perhaps you and your employer are sharing the cost of your critical illness cover. It’s not common, but it’s not unheard of either. In this instance the tax-free proportion of any payout will mirror the proportion that you contribute to the premium. For example if you pay 75% of your critical illness cover and your employer pays 25%, the first 75% of any payout will be tax free. The remaining 25% will be taxed through PAYE.

It’s important to be clear on who’s paying for any critical illness policy that you have. Sometimes people simply forget that they signed up for policy payments to be taken from their payslip. If you are in any doubt, talk to your employer.

Do you have any questions?

Our mission is to take the confusion out of financial planning, so you can make clear, confident decisions about your financial future. But don’t just take our word for it. Allow us to give you a free initial consultation and we can share some ideas about how we could bring more clarity to your finances. If not, thank you for reading.