Is it possible for me to take out an Income Protection Insurance policy and pay the premiums through my limited company?
Many of our clients are directors 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 post-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 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 because you’ve already paid tax on the money used to pay premiums.
However, it may also be possible to take out a personal plan and pay the premiums through a limited company. Whether the premiums can be classified as a business expense would come down to the opinion of the local inspector of taxes and your accountant, so it’s important to have this discussion with them.
Executive Income Protection 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 back into the company to distribute accordingly. The business can then 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 amount of income after tax for the director / employee (the benefit would be taxed as income for the employee).
When taking out cover through a limited company most providers require the policy to be set-up by an expert adviser. If you need any help please do not hesitate to pop us a call on 02084327333 or email firstname.lastname@example.org.
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