3 min Read
13 Oct 2016

Are income protection insurance benefits taxed?

Reader question: Are income protection insurance benefits taxed?

Are income protection insurance benefits taxed?If I was off sick and had to claim on my income protection policy would the benefits I received be liable to an income tax deduction?

The answer to this question would really depend on the type of policy and who pays the premiums, let me explain.

What is income protection insurance?

  • income protection insurance will pay out pre-set out amount on a monthly basis if the insured is unable to work due to accident or illness
  • benefits from an income protection policy will normally continue until the insured returns to work or retires
  • the maximum level of cover under an income protection policy is limited to around 60-65% of monthly salary
  • setting up an income protection policy will require completion of a health questionnaire with premiums set accordingly

Personal income protection policy

  • this is an income protection policy that has been arranged by the insured person
  • all premiums are paid by the insured
  • benefits paid under this type of income protection policy are paid totally free of income tax

 Income protection policy provided by employer

  • this an income protection policy arranged by an employer for the benefit of an employee
  • premiums on this type of policy may be paid by the employer, employee are both
  • if the income protection premiums are paid by the employer then benefits would be taxed as income
  • if the income protection premiums were paid by your employer but you paid the tax on these premiums then any benefits would not be taxed as you would have effectively paid the premiums out of your taxed income
  • if you paid all or part of the premiums on this type of income protection policy then tax will be levied, in the same proportion, on any benefits paid
  • for example if you paid 50% of the monthly premium then you will be taxed on 50% of the benefits paid

How to find the best income protection policy for you

You can compare income protection quotes with this online income protection tool. I would always recommend that you speak to a firm specialising in income protection and life insurance.

Find the best value income protection policy for you

Get an instant income protection insurance quote in seconds, comparing the whole market

Find the best value income protection policy

I have vetted the service provided by this income protection specialist which I would recommend. Not only are they experts in their field but they will only recommend what is right for you, even if that is for you to not to take out an income protection policy at all.

 

Article overview

Key points

  • Taxation depends on the type of policy and who pays the premiums.
  • Benefits paid under a personal income protection policy this are paid totally free of income tax
  • If income protection premiums are paid by the employer then benefits will be taxed as income.
  • If the income protection premiums are paid by your employer but you pay the tax on these premiums then any benefits would not be taxed as you would have effectively paid the premiums out of your taxed income
  • if you pay all or part of the premiums on an employer provided income protection policy then tax will be levied, in the same proportion, on any benefits paid.

Written by Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.

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