May 6th, 2020

Is income protection insurance a taxable benefit?

It’s one of those products that you hope you will never have to use, but is income protection insurance a taxable benefit? Well, that depends on who pays the premium. Let’s look at what your tax liabilities are in the event of an income protection insurance payout.

Do you need to pay tax on an income protection payout?

In life it’s best to try and prepare for the unexpected as best you can. That’s where income protection insurance can be a big help. It covers your lost income if illness or injury forces you off work – allowing you to take care of your overheads while you recuperate, without dipping into your savings.

Of course, ideally we would never be forced off work due to illness or injury. But if the unexpected did happen and you had to call on your income protection insurance, a successful claim would leave you with a series of weekly or monthly payouts to cover your salary until you were well enough to return to work.

But is income protection insurance a taxable benefit? That depends on your circumstances. Let’s dig in to it.

If you pay the insurance premiums yourself

Do you pay for your income protection insurance from your own pocket? Then there’s no tax liability on a payout. That’s because – as far as HMRC is concerned – you are paying your premium using money that has already been taxed: either through your employer or through Self Assessment if you are self-employed. The upshot: any payouts you receive from your income protection cover will be yours tax free.

What if your employer pays for your cover?

Some employers provide income protection cover as a staff perk. If that’s the case with you then tax will be due on any payout that you receive. Again, it’s all about whether the money that’s used to pay your premium has been taxed or not. And when your employer is paying your premium, they can – and most likely will – seek corporation tax relief on the premium payments they are making on your behalf. Any payouts you receive will most likely be sent direct to your employer and taxed via PAYE, in the same way your salary is.

If you share the cost of the premiums

You may be in a situation where you and your employer are sharing the cost of your premium payments. Okay, that’s a little more complicated. But essentially in the event of a payout, the percentage of the sum that incurs tax liabilities will be the same as the percentage of your premium that your employer pays on your behalf.

Here’s an example. Let’s imagine your employer pays 75% of your premium, and you pay the remaining 25%. If you received a payout you would pay tax on 75% of the total payment. So if you received a sum of £2,000, you would pay tax on £1,500 at your normal rate.

Now, it’s worth noting that you could be making payments towards a monthly or annual premium without even knowing – either because you forgot or your employer was unclear – with the money extracted from your income before you see your payslip. If you are uncertain ask your employer.

Want a little more insight?

As a team of skilled financial advisers, we are here to take the question marks out of income protection. If you would like a free initial consultation with one of our experts, please get in touch. We are here to help.