Is income protection insurance a benefit in kind if paid by an employer?

tax calculator

If you’re lucky you may receive various perks from your employer, which has been a long-accepted practice and routinely sees staff bag various benefits including company cars, private medical insurance policies, clothes allowances, elements of childcare, public transport passes, relocation packages, discounted gym membership and subsidised loans.

Of course there are some well-documented companies out there who take employee perks to an altogether different level, like for example Google; who provide their bright young workforce with free  food throughout the working day. What’s more those who are on the pay roll at the globe’s biggest search engine also get to enjoy free car washes, oil changes, massages, yoga, childcare assistance and access to a play room. Fellow techno geeks over at Yahoo offer their worn-out execs the opportunity to let off steam with on-site volleyball, company BBQs and music concerts.

Elsewhere some firms even go as far as to share their accumulated wealth right down to the last man/woman, like one US-based health insurer which awarded almost $4million in staff bonuses across the board; when typically just an extra for directors and management.

Others afford their employees generous time-off benefits, whilst some really know how to help their staff achieve that perfect work/life balance that we all strive for. Such as an aerosol manufacturer in America which offers on-site concierge services to its charges who are tasked with helping them out with extra-curricular chores. Literally covering everything from picking up the food shopping and arranging motor insurance policies to taking your car in for a service and (believe it or not) standing in line to wait for concert tickets.

Crashing right back down to earth (at least here in the UK) and employee perks aren’t quite in the same league, but that’s not to say that we’re not well endowed in certain, more conventional areas.

In essence employee benefits packages are a sound investment, as from a company perspective the provision of an all-enveloping, relevant and well-communicated benefits package goes a long way to ensuring that they attract the cream of the professional crop, while also going an equal distance to retain a happy, committed workforce. Likewise, and from an employee stance, an appealing benefits plan represents a certain level of peace of mind if/when faced with unpredicted events such as becoming ill or sustaining an injury which compromises your ability to hold down said role.

Get a FREE income protection quote

Get a quote


And in other areas it can save you a bit of money on day-to-day expenses too.

There’s no hiding from the taxman at the end of the day, not even with BiK income protection provided by a generous employer

That’s as maybe, but what we really want to know is where precisely do things currently stand in the eyes of the taxman with regards to income protection insurance policies being handed out by employers as staff perks? Which is where things tend to go a bit grey and blurry we’re afraid to report. At least for employers that is.

But before we (at least try to) explain, let’s begin by recapping as to how the HMRC view what the Government office terms as ‘gifts’ generally, so that we get a broader understanding of what specifically constitutes a benefit in kind (or BiK) in the first place. The accepted law of the land is that anything received by an employee from an employer is likely to be regarded as taxable, with the noted exceptions to this rule being when a company can fundamentally prove something has been gifted to an individual staff member solely out of friendship or when the ‘present of a personal nature’ is considered to be suitably modest. And that modesty in monetary terms equates to items received costing under £50.

Although also worth pointing out that if the item is handed over in either cash or voucher form then it will ALWAYS be deemed taxable, irrespective of it coming in under the £50 benchmark. As a rough guide to the way the HMRC officially address this issue, a benefit in kind WON’T be liable for tax if it’s described as ‘trivial’. By this they mean (and as clarified above), representative of less than £50 in value, NOT a cash or cash-redeemable voucher, NOT a reward or bonus directly related for an employee’s work efforts, NOT forming an acknowledged part of an employment contract and NOT a ‘salary sacrifice’. Anything else and you’ll have to pay the price somewhere done the line. BUT, how does all this hold up in relation to income protection insurance?

Income protection as you may or may not already know pays a percentage of an employee’s salary each month (usually in the region of between 60 – 80%) in the event that they are unable to hold down their existing position because of sustaining a serious injury or being diagnosed with a long-term illness. If you were to be in receipt of such a widely-available plan through your current employer (as opposed to arranging a private policy under your own steam) this is referred to as ‘group income protection’, and one of the advantages of this over a personally-sourced plan is that in many cases any pre-existing medical conditions that an employee might have been suffering from are encompassed.

Get a FREE income protection quote

Get a quote


Something which rarely happens should the individual negotiate their own private income protection insurance package.

Due to its broadly-enveloping nature (group IP is habitually expansive to cover a cross-section of staff at any one time) this reduces the overall cost to companies as the chances of someone registering a claim is then spread over a greater volume. Which makes it significantly less in terms of premium price than it would if a staff member took out a similar policy themselves. With regards to employee benefits and this amounts to continued sick pay when required and support from the company and employer-provided rehabilitation schemes for the most part.

Income protection insurance when provided as a perk isn’t as clear cut (and tax-free) as you might otherwise have been led to believe

But here’s the rub we hinted at earlier. While some income protection insurance companies suggest that there’s ‘no benefit in kind tax penalties’ for those subscribed to employer-fronting packages to worry about, others conversely allude to group IP being taxable; which is where the confusion obviously sets in. So to get a definitive understanding of where exactly the taxman stands on this, we’ve turned to various business advice directories. These resources rightly state that should an individual take out a personal income protection insurance policy unconnected to their employers, where a claim is submitted by the sole-named policyholder then any monies recompensed is tax free as per a special exemption being in force; namely section 735 of the Income Tax (Trading and other Income) Act 2005 (ITTOIA) for those interested.

However the lay of the land is slightly different – and open to being far more misconstrued – when it comes to group income protection insurance. It clearly states that when a company takes out a large scale, multi-person scheme it’s the EMPLOYER’s responsibility to pay the premium as a benefit in kind on behalf of their employees. Which is welcome news for the latter, as essentially this constitutes that the exemption mentioned above is extended to employees who benefit for a policy sanctioned on their behest courtesy of their employer; and in strict accordance with the Income Tax (Trading and other Income) Act 2005, section 743 ITTOIA 2005.

But there’s an inevitable catch. If you read a copy of the taxman’s instruction manual it states the following; “If it the premium was taxed as a benefit the employee would have, in effect, paid the premium out of taxed income. Payments received under the policy would therefore be exempt.” Which admittedly makes it about as clear as mud. What it roughly translates as is the tax-free status enjoyed by income protection insurance on the surface is LOST where tax relief is allowed to the employee as a by-product. Which it is, theoretically. You see if an employee isn’t responsible for paying tax on a premium such as a benefit in kind, then they’re received a tax relief for all intents and purpose, which as a direct result is taxable.

This ultimately means they’ll have to pay tax on any monies they receive from the policy in the event of a future pay-out (which follows a successful claim being lodged). That is unless an employee is charged tax after receiving the benefit in kind (income protection insurance policy) from their bosses, which would subsequently mean they wouldn’t have to then stump up if/when they received a settlement figure from a future claim.

Put it this way, the taxman is destined to get his pound of flesh by hook or by crook and there’s very little you can do about it. So to answer the original question (if you can cast your mind/scroll back THAT far, then the answer is yes; Income Protection IS a Benefit in Kind if Paid By an Employer, but despite this you’ll be paying for it in some taxable way somewhere down the line.

Get a quote for income protection insurance today

Here at Bobatoo we work with a host of leading income protection insurance providers to help find you a great deal.

Get your free, no obligation quote now:

Get a quote