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.