How are IP premiums and benefits treated for tax purposes with employers?
If an employer pays income protection (IP) premiums they are usually treated as an allowable business expense. However, where they pay the premiums for a controlling director they are not usually an allowable business expense, except at the Inland Revenue's discretion.
This discretion is unlikely to be exercised unless the employer also provides comparable benefits (at comparable cost) for a significant number of employees.
The premiums will not, however, be assessed for tax on the member as a 'benefit in kind.' Where premiums are paid by a partnership for partners, they are not normally an allowable business expense.
If an employer has paid an employee's premiums, benefits are payable to the employer and are treated as trading receipts. However, the employer will then pass the benefit on to the employee in the form of continuation of salary, therefore the monies will be subject to tax under PAYE and National Insurance contributions. Where premiums are paid by a partnership for partners, benefit would normally be payable directly to the incapacitated partner, in order to avoid any tax liability.
Where the client is able to exercise flexibility around the structure of their cover, for example, employer or employee-funded, those who choose to set the policy up as employer-paid, do so in order to benefit from tax relief on the premiums.
However, you also need to consider an employer-funded premium may be higher, because a greater level of cover may be required to allow for the fact that benefits will be taxable.
If the plan is set up on a personal basis, employee-funded, the policyholder will not currently benefit from any tax concession unless they are unfortunate enough to make a claim, in which case benefits would be paid free of Income Tax.
Nick Homer
