Is income protection tax deductible for a limited company?

If your limited company pays for your income protection, can it claim the premiums as a business expense and reduce its Corporation Tax bill?

In many cases, it can. However, the tax treatment depends on how the policy is set up and what it is designed to do.

This is particularly important with Executive Income Protection, where your company owns the policy, pays the premiums and receives any payout if you make a successful claim.

Here, we look at the tax treatment of company-paid income protection, including Corporation Tax relief, tax on any payout and how this differs from paying for a policy personally.

For an overview of how the cover works, read our guide to income protection for limited company directors.

Can a limited company pay for income protection?

Yes. Your company can take out an Executive Income Protection policy to cover a director or employee.

The company owns the policy and pays the premiums directly to the insurer.

If illness or injury prevents you from working and you make a successful claim, the insurer pays the benefit to the company. Your company can then use the money to continue paying you while you are unable to work.

This is different from personal income protection, where you own the policy, pay the premiums from your own post-tax income and receive any payout directly.

Is income protection tax deductible?

Executive Income Protection premiums may be deductible when calculating your company’s taxable profits.

However, you shouldn’t assume that Corporation Tax relief is automatically available simply because the company pays the premium.

HMRC says the tax treatment of insurance premiums depends on what is being insured and whether the insurance has been taken out for the purposes of the trade.

Its guidance also covers policies taken out by employers in connection with employees and directors.

You can read HMRC’s guidance on the tax treatment of business insurance premiums and insurance covering employees, directors and other key people.

If you’re unsure whether the premiums are deductible in your particular circumstances, check with your accountant.

For more information on the general rules, read our guide to limited company expenses.

How does the tax treatment work?

The core tax position depends on whether your company or you personally own the policy.

This is one reason not to compare personal and company-paid policies solely by premium cost.

What happens when an Executive Income Protection policy pays out?

With Executive Income Protection, the insurer doesn’t normally pay the monthly benefit directly to you.

It pays your company.

Your company can then use the money to continue paying your salary or other insured remuneration while you are unable to work.

HMRC’s general guidance states that where insurance premiums are allowable deductions from trading profits, policy receipts will usually be taxable as trading income.

The company then receives a deduction for qualifying remuneration it pays to you in the normal way.

The money you receive from the company is taxed as remuneration rather than as a tax-free personal insurance payout.

This is quite different from a personal income protection policy, where you pay the premiums from your own taxed income and any benefits are normally paid to you tax-free.

Is Executive Income Protection a benefit in kind?

This is another question directors often have when their company pays for the policy.

With a genuine Executive Income Protection arrangement, the company owns the policy and receives the benefit.

This is different from your company simply paying the premium on a personal policy that you own.

If the company pays a premium that is actually your personal liability, different tax rules can apply, and the payment may be treated as taxable earnings or a benefit.

Make sure the policy is set up in the correct name rather than simply paying a personal income protection premium from the company bank account.

If you’re not sure how your policy has been structured, check with the insurer or your adviser.

What about salary and dividends?

The tax position isn’t the only thing to consider if you’re a company director.

Many directors take a relatively low salary and receive the rest of their income as dividends.

Some Executive Income Protection policies take qualifying dividends into account when working out how much income you can insure.

The rules vary between insurers, so check what counts before taking out cover.

For more information, read our guide to income protection and salary/dividends for limited company directors.

Company-paid or personal income protection?

The possibility of Corporation Tax relief makes company-paid income protection attractive, but tax isn’t the only consideration.

With Executive Income Protection, the company pays for and owns the policy. Any successful claim is paid back to the company.

With personal income protection, you pay the premiums yourself and receive any claim directly.

The amount of income you can protect, treatment of dividends, policy terms and how the benefit reaches you can all differ.

Don’t choose a policy simply because one option appears to have the better tax treatment.

Look at the amount of cover you would actually receive and how the policy works if you need to make a claim.

Check the tax position before taking out cover

The tax treatment of company-paid insurance depends on the policy and the circumstances in which it is taken out.

Before arranging Executive Income Protection, check:

• who will own the policy;
• who will pay the premiums;
• who receives the benefit if you make a claim;
• whether your company can deduct the premiums when calculating its taxable profits;
• how any insurance proceeds will be taxed; and
• how payments from the company to you will be treated.

Your accountant can confirm how the premiums and any future payments should be treated for tax purposes.

For more information on the tax your company pays on its profits, read our guide to Corporation Tax for limited companies.

Find out more

If you would like to learn more about how executive income protection works in practice and the potential tax benefits of paying premiums through your own company, our trusted partner, Broadbench, will be happy to help.

Broadbench has helped hundreds of our visitors over the past ten years.

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