Tax Payable On Permanent Health Insurance (PHI)

[Coolshot]

I started another thread on this in General but have specific question relating to tax on PHI income. The provider has quoted several income amounts in the event of long term sickess but state that while the monthly premium is an allowable business expense the payments made to the employee are taxable.

If for example the policy paid out a gross £3,000 per month would I need to calculate the nett income after both employer & employee NI & PAYE or can the policy income be treated as company revenue, pay corporation tax then continue paying minimum salary/rest as dividend combination? The answer to this will determine the level of cover I take.

[Jessica@WhiteFieldTax]

I started another thread on this in General but have specific question relating to tax on PHI income. The provider has quoted several income amounts in the event of long term sickess but state that while the monthly premium is an allowable business expense the payments made to the employee are taxable.

If for example the policy paid out a gross £3,000 per month would I need to calculate the nett income after both employer & employee NI & PAYE or can the policy income be treated as company revenue, pay corporation tax then continue paying minimum salary/rest as dividend combination? The answer to this will determine the level of cover I take.

Check how the policy is written.

Employment income: sick pay and injury payments: sick pay funded by the employer - permanent health insurance refers to policies written inn business name, which is what you are implying if tax relief is to be given on premium. The polcy receipts would count as business income and can be distrusted as dividend or salary subject to normal rules.

Compare and contrast, if the policy is written in personal name and no tax relief claimed, then the payouts are tax free.

also see

IPTM6110 - Sickness disability and unemployment insurance: tax treatment from 6 April 1996: main rules: scope
Sickness disability and unemployment insurance: tax treatment from 6 April 1996: employer’s schemes and other situations where someone else has paid part of the premiums

[Coolshot]

Check how the policy is written.

Employment income: sick pay and injury payments: sick pay funded by the employer - permanent health insurance refers to policies written inn business name, which is what you are implying if tax relief is to be given on premium. The polcy receipts would count as business income and can be distrusted as dividend or salary subject to normal rules.

Compare and contrast, if the policy is written in personal name and no tax relief claimed, then the payouts are tax free.

also see

IPTM6110 - Sickness disability and unemployment insurance: tax treatment from 6 April 1996: main rules: scope
Sickness disability and unemployment insurance: tax treatment from 6 April 1996: employer’s schemes and other situations where someone else has paid part of the premiums

Jessica, thank you. I am looking at a policy written in the business name. Hopefully I'll not need to claim & doing it this way make the premiums a little (20%) cheaper.

[northernladuk]

I was told not to do PHI though the company as it has BIK element so it isn't 20% cheaper. Did you ask your accountant about this?

[Coolshot]

I have forward the email from Contractor Financials to my Accountant this morning. I did ask about a possible BIK arising. I'll post back when they reply.

[Jessica@WhiteFieldTax]

I was told not to do PHI though the company as it has BIK element so it isn't 20% cheaper. Did you ask your accountant about this?

Will depend who is insured, the company or the individual.

If a company pays an individuals own premiums, then, yes, BIK.

Three scenarios:

~ individual insured, company pays - company claims relief, individual pays BIK, policy receipts tax free
~ individual insured, individual pays - no tax relief, no BIK, no tax charges
~ company insured, company pays - company claims relief, no BIK, policy receipts taxed in company

In theory, as a contract of insurance is priced to make money for the insurer over the population as a whole, policy receipts should be less than premiums, therefore on balance of probabilities you will pay more in than you get out, which suggests a company policy is the best solution with tax relief on the premiums and tax on any claim. However this is muddied by pricing.

[adam42]

I'm looking at swopping over my PHI to a company-based policy with Unum but the financial advisor who I set up my current individual-based policy with are recommending against it:

As a company, we’ve actually decided to no longer recommend the company funded income protection as there are some concerns around this. Mostly, it’s because it’s designed to protect employees of a limited company rather than the director themselves but also because it’s a bit of a grey area in relation to the tax treatment of the policy.

Apart from the issues discussed earlier in this thread, does anybody recommend against this 4 years on from these posts?

[WordIsBond]

I'm pretty sure what Jessica said still holds. She gave three options.

If you want the benefits to be paid directly to you, rather than to your company, you are choosing between the first two. Between the two, it may be more tax-efficient to have the company pay the premium and treat it as a benefit in kind. You save corporation tax and pay employer NI. But you'd want to run the numbers (or have your accountant do it).

The third option provides an income to the company. That would be taxable under corporation tax. Whether you would have any personal tax when it is disbursed to you would be based on the same rules for disbursing any other funds from the company -- salary, dividend, whatever.

We're doing PHI through the company. It's marginally tax-advantageous to my wife and I, and a nice benefit for others.

[Chart Accountancy]

I'm pretty sure what Jessica said still holds. She gave three options.

If you want the benefits to be paid directly to you, rather than to your company, you are choosing between the first two. Between the two, it may be more tax-efficient to have the company pay the premium and treat it as a benefit in kind. You save corporation tax and pay employer NI. But you'd want to run the numbers (or have your accountant do it).

The third option provides an income to the company. That would be taxable under corporation tax. Whether you would have any personal tax when it is disbursed to you would be based on the same rules for disbursing any other funds from the company -- salary, dividend, whatever.

We're doing PHI through the company. It's marginally tax-advantageous to my wife and I, and a nice benefit for others.

I am not sure I can agree with Jessica here as what she has given as options is relevant for Group Income Protection not PHI as for PHI the beneficiary is always the individual, so it will always be a taxable benefit as I can not see how the company will receive the health care, it is the employee who receives it.

[Jessica@WhiteFieldTax]

Whether it's PHI or Income Protection is really the opposite sides of the same coin IMV - the name changes according to the product used - and there isn't always clarity across providers. I don't think it detracts from the fundemental differences in tax treatment around payee/beneficiary I outlined.