Group income protection – how is it taxed?

Group income protection schemes can provide valuable income security for employees and employers alike. In this article we explain the tax treatment of group income protection for employers and employees.

You can read more about group income protection in our article, "What is group income protection?".

Group income protection - tax information for employers

How are group income protection claim benefits taxed?

If there is a claim against a group income protection scheme for an employee who is incapacitated to work, the scheme will pay the insured's monthly benefit to the employer tax-free. This benefit is then paid through the normal payroll, where it will be taxed as income before the employee receives it so both income tax and national insurance will be deducted.

How are group income protection premiums taxed?

The premium that a business pays for group income protection can be treated as a business expense under current HMRC tax rules. This means that the cost of the group income protection scheme will be offset against profits which has the knock-on effect of reducing corporation tax.

Group income protection - tax information for employees

Income tax

An employee who is incapacitated and in receipt of benefits through a group income protection scheme will receive benefits through their normal PAYE payroll. It is taxed as income by the employer before the benefits are paid to the employee.

Benefit in kind P11D tax

Group income protection benefits are not subject to P11D benefit-in-kind tax for employees as long as the employer pays for the cost of the cover, but if Optional Remuneration Arrangements (OpRA) are used to fund it.

Further resources

Expenses and benefits for employers source: www.gov.uk

Income tax rates source: www.gov.uk