Formerly known as Permanent Health Insurance (PHI), IPI is an insurance paid when a person is incapacitated to work their usual work that they are qualified to perform due to illness or accident.
Typically policies pay out around 65% of gross earnings, although this may be lower for high earners.
Some providers will allow dividend income to count towards total income, but many will not. Therefore careful selection of a provider is important as generally Contractors take a low salary with the majority of income taken as dividends.
Policy prices will vary according to the provider. Taking a policy with a deferred payout period substantially reduces the cost of the policy; timescales can vary from 4 weeks to 52 weeks deferment, so personal financial consideration needs to be made.
Policies also have restrictions for certain conditions, so checking the small print is advisable.
Policy paid for by the Individual
This would involve a policy being taken out in the individual’s name and they make the payments personally.
Any claim made under the policy is paid to the individual and is free of tax and NICs. Tax relief for the premiums is not applicable.
Policy paid for by the Company
This is particularly relevant when it is a limited company consisting of just one person who is the shareholding director.
Under this route; it is perfectly allowable for the company to take out a group policy in the company name, and pay the premiums which are treated as a genuine business expense. This would reduce profit and thus reduce tax.
On the basis that the premium would be exactly the same as paid by the company as if paid by the individual, then clearly the ability to obtain tax relief on the premium is in itself an immediate advantage.
However, the situation becomes a little more complex if a claim is then made. Any benefit payable would be paid to the company (as it is the company that owns the policy and has paid the premiums) and the benefit would then be treated as a trading receipt and corporation tax would be charged.
If a claim is made, the company would then pay it to the individual employee via the usual PAYE system. The benefit would then attract income tax and national insurance in the usual way. At the same time, the employer would treat these payments to the employee as a genuine deductible business expense. As the insurance is paid through PAYE to the employee, there would not be a benefit in kind charge on the claim made. However, the employee is liable to a benefit in kind (BIK) charge on the monthly premiums.
Conclusion
A policy in the individual’s name is by far the most simple method, particularly if a claim is then made at some future date, in that the benefits payable are genuinely tax free to the individual.
However, it must be acknowledged that the route whereby the company pays the premiums does have a taxation advantage, in that the premiums can be treated as a deductible business expense. The complication arises if and when a claim is then made, as detailed above.
From the employee perspective; the BIK charged annually when the company pays the policy will obviously be cheaper than paying the premiums personally. However, if a claim is made, the tax and NICs through PAYE will be far higher than the cost of the premiums when paid personally.
Article written by Sally Fletcher
