taxing permanent health insurance

taxing permanent health insurance

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In idly checking on the tax status of payments under a PHI policy (what we must now call IPI) for a completely different reason (double taxation), I came across an assertion from the Citizens Advice Bureau no less that the income came within "other payments which are not taxable."  My client had been receiving the payments under deduction of tax and NI through a company payroll.  Should they have been receiving the income gross?  I can't believe the income should have been paid gross, but the CAB guidance seem unequivocable.  Has anyone come across this before?

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Red Leader
By Red Leader
04th May 2011 11:09

possibly not the same thing

If memory serves, I think the difference is between (i)payments made by an employer to the employee in the course of business, and (ii)payments made directly to the individual by the insurance company as a result of a personal insurance policy.

In the first case, the employer is taxed on the insurance payout but then the payment to the employee is remuneration and a business expense. It is the second case that you've probably read about where the receipt is not taxable. Such policies are typically worded to payout the equivalent of the person's after tax income which reinforces this view.

Not sure, but I think this is right.

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By glynisbm
04th May 2011 13:15

PHI
Found this on HMRC website.......might be helpful to you;

Sections 62 and 221 ITEPA 2003
The employer may provide the funds for sick pay directly or through a trust or insurance policy. Whichever method is used, the sums paid to employees are taxable as earnings within Section 62 or Section 221 ITEPA 2003.

If the employer enters into an arrangement to insure any costs arising from his liability to provide sick-pay this is merely a funding arrangement. Money flows from the insurer to the employer who then pays out sums to the employee as sick pay. Sick pay received by the employee in these circumstances falls within the definition of “earnings” provided by Section 62 ITEPA.

Alternatively, the insurer may choose to pay sums directly to the employee rather than providing the funding to the employer. If there is any dispute about the scope of “earnings” in such cases then Section 221 provides a clear charging mechanism

As the amount to be taxed is the same in either case it will not usually be necessary to decide which section applies. However, Section 221 covers the situation where the employee may have contributed to the fund that provides the sick pay. In such cases only that part of the sick pay attributable to the employer’s contributions are charged to income tax.

The sick pay is taxable whether it is paid to the employee or a member of their family or household. In this context this means the employee's spouse, the employee's children and their spouses, and the employee's parents and dependants.

Where sick pay is provided under arrangements between the employer and an insurance company or by some other third party fund, the right to receive sick pay or the prospect of receiving it is not a benefit chargeable under the benefits code (see EIM21820).

Permanent Health Insurance (PHI)
The arrangements described above may be distinguished from Permanent Health Insurance (PHI) sometimes known as “income replacement” schemes. PHI arrangements create entitlement for individual employees who are unable to work because of illness or disability – see the Insurance Policyholder Taxation Manual at IPTM6100 and subsequent.

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By Blakeney
04th May 2011 15:16

Thanks to those who answered

Both responses are immensely helpful. I conclude that the tax treatment was correct.  The distinction between a personal scheme and a company scheme appear to be the key.

I also conclude that the CAB guidance is very misleading.if taken at face value. Since I audit two CABs locally, I can point it out to someone who'll take me seriously!! 

 

 

 

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By jbayman
05th May 2011 23:56

PHI

I agree with the other comments and the Citizen advice bureau..

Sounds like your client is receiving benefits from either an individual "executive" IP plan or a group IP plan. Both of these are company sponsored arrangements which effectively covers the employers ability to maintain the employee's income.

Benefits paid to the employer from the insurer are taxed as a trading receipt and the employer then passes those onto the employee as continued salary. The employee is subject to normal income tax and NICs and the company claims relief on the payment as normal. Thus the tax situation on the employer is neutral.

Personally held IP is recieved tax free, however the premiums will have been paid from the employees post tax /NIC'd income. Executive / group IP premiums will have been paid by the company with no P11D charge arising on the employee. So it's swings and roundabouts.

Generally speaking higher benefits are available under an executive IP scheme than a personal one because of the tax penalty.

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