Answered by Tom Conner
How to pay your premiums through your limited company
Many of our clients are a director of their own limited company and in this situation there are a few options to consider when setting up an income protection policy.
Income protection insurance can either be paid by the individual out of after tax income or paid for by the company. Which method is more cost effective comes down to the policy choice (either a personal or executive plan) and the respective tax implications.
With this option the policy is taken out and owned by an individual and is most commonly paid for from a personal bank account out of the individual’s net income. In this situation the monthly benefit payable to the individual upon a claim would be free from income tax under current regulations.
However, it may also be possible to take out a personal plan and pay the premiums through a limited company. In this situation, the benefit would still be free from income tax provided that the premiums are disclosed as a P11D benefit and taxed accordingly. Whether the premiums can be classified as a business expense would come down to the opinion of the local inspector of taxes.
An executive income protection policy is commonly taken out either by company directors looking to protect themselves or by firms wishing to offer this cover to a small number of specific staff as an employee benefit (as opposed to covering a larger number of staff under a group income protection scheme).
With this type of policy the plan is actually owned by the business and any benefit paid out is paid to the business. The business is free to use the funds however they wish with the most common being to pay the individual the monthly benefit as a form of sick pay.
It should be noted that the payout would be treated as a trading receipt and taxed accordingly; this is why the level of cover needs to be grossed-up to leave an appropriate level of after tax income for the director/employee (the benefit would be taxed as income for the employee).
As before, whether the premiums can be classified as a business expense would come down to the opinion of the local inspector of taxes. Drewberry usually provide both options (executive and personal) for discussion with an accountant.
None of the content in this post should be taken as tax advice. You should consult your accountant for advice on which method is the most tax efficient.
Frequently Asked Income Protection Insurance Questions
Excellent service at convenient times of the day specified by me. All product options were clearly outlined and I am very pleased.
First class service. Helped me through the process from start to finish. Egle and Francis were very professional and talked me though all my options. Once the policies were set up, the after care after was also first class. Highly recommend. 5 stars all day long.
Victoria was very helpful about selection of suitable insurance. She always answered all questions in a timely manner.