Do I Pay Tax On Income Protection Benefits?

I’m thinking about taking out an Income Protection policy. I can’t seem to find any information about how I pay tax on the benefit if i make a claim?

Question asked by Richard Wright

Income Protection & Tax: Watch Our Expert Video

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Income Protection & Taxation

Income Protection payouts are generally tax-free. This is because with personal policies, you pay for the premiums out of your net pay and they are taxed. As a result your policy is seen as already having been taxed, therefore no tax is paid on a claim payout.

Because of this, most insurers generally allow you to insure 65% of your gross income. This is roughly the same as your net income.

Paying For Cover Via Your Limited Company

Some company directors pay for their income protection premiums via their business. This is known as Executive Income Protection.

With this particular type of Income Protection, a business pays for the premiums. Usually these are then classed as a tax deductible business expense. This means the policy hasn’t been taxed at the payment stage and so is generally taxable as income on a claim.

If a claim is made benefits will be paid back to the business as the company owns and pays for the policy. When the payment is then distributed from the company to the individual, it will be taxed accordingly.

Need Expert Help?

We would recommend you speak to your tax adviser or accountant for advice to ensure you are clear on any tax implications.

If you are considering a setting up Income Protection whether personally or through your business please do not hesitate to pop us a call on [dynamic_number or email we are here to help.

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