Are income protection premiums tax deductible and can I offset them as a business expense?

I want to take out income protection but, as a company director, I want the business to pay and expense the premiums, is this possible?

Question asked by Amal Rachid
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Answered by Tom Conner

Firstly, it is always wise to consult your accountant on matters of taxation and any final decision will always rest with the local tax inspector.

However, it is often permissible to expense income protection premiums as a business expense. With this it is important to note that tax will be liable either on the way in or the way out (i.e. on the premiums or on the benefit).

Be careful, your benefit may be taxed

If you wish to put your income protection premiums through as a trading expense it is usually wise to take out an executive income protection plan rather than a personal plan.

With a personal plan tax is paid on the premiums (which are paid from after-tax earnings) and the benefit is tax free, however, with an executive/directors plan the premiums can usually be expensed but the benefit paid out will incur income tax and national insurance contributions.

Need to insure the income tax liability

Thus, with an executive plan the insurers will usually allow you to cover up to 80% of gross earnings rather than up to 60% with a personal plan. This is because you would need to insure a higher amount to cover the tax.

Essentially, with an executive plan the business takes out the plan and pays the premiums on your behalf but any benefit paid out would be paid to the business, which would then pay you via the Pay As You Earn (PAYE) system.

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This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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