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The taxation of employee insurance
20 January 14 | By: Jas Jhooty
If an employer pays insurance premiums for a policy that relates to an employee, the tax position depends on the type of the policy and the destination of any policy proceeds. This article discusses the tax implications of common employer provided insurance policies.
Corporate accident life policies
A policy may be taken out by a company on a director or employee, to compensate the company for financial loss on that employee’s death or absence from work due to illness or accident. These “key man” policies do not usually attract any taxable benefit on the employee as the “key man” does not derive any value from it.
Policies to provide employee benefits
Where the employer funds a policy to provide benefits for an employee in the event of retirement due to accident, or to provide death in service benefits there is no tax to pay on either the premiums or the benefits provided under the policy. Common benefits of such insurance schemes include: –
- any pension,
- lump sum,
- gratuity etc
These can all be made to the employee or their spouse or other dependants tax-free on death or retirement.
Individual life and group policies
If an employer pays an employee’s personal life policy premiums this is taxable as general earnings because the employer is settling the employee’s pecuniary liability.
However a group life assurance scheme set up by the employer to provide lump sums on employee’s deaths can be tax-free if the scheme meets the requirements for a registered pension scheme.
Sickness and permanent health insurance
An employer may take out insurance to provide payments to an employee or their family in the event of their absence from work due to illness or disability. Any benefits arising of such policies are exempted from tax.
Private medical insurance
Medical insurance is almost always taxable. For an in-depth article on the taxation of medical insurance click here.
Directors’ and officers’ liability insurance
A company may arrange insurance to provide its directors and senior employees with protection in the event they are found personally liable for any claims made against them in their employment capacity.
These policies can be exempt from tax providing certain conditions are met. The rules for ascertaining the taxable status of such policies are quite complex. If a policy is taken out whose main purpose is to avoid tax, then the premiums paid under such a policy will be taxable.
How emTax can help
There are various statutory exemptions in place that prevent the taxation of certain types of employee related insurance premiums paid for by employers. Some of the rules associated with these exemptions can be complicated. If you require any assistance with any HMRC enquiry into your insurance schemes, please do not hesitate to contact us.