Executive income protection tax – a guide for company directors
One of the attractions of executive income protection is that your limited company can pay the premiums, rather than you paying for personal income protection out of your post-tax income.
The limited company may be able to claim the premiums as an allowable business expense for Corporation Tax purposes. If a claim is made, the benefit is paid to the company and is generally treated as taxable income.
The tax treatment of personal income protection is different. You pay for the policy yourself from your post-tax income, but any claim payments are normally paid directly to you tax-free.
Company-paid vs personal income protection
| Executive policy | Personal policy | |
|---|---|---|
| Policy owner | Limited company | Individual |
| Premiums paid by | Limited company | Individual |
| Corporation Tax relief | May be available | Not available |
| Benefit-in-kind | Not normally | Not applicable |
| Claim paid to | Limited company | Individual |
| Tax on claim | Generally taxable within the company | Normally tax-free |
| Income covered | May include salary, dividends and certain employer costs | Based on personal income |
Can your company claim tax relief on the premiums?
Potentially, yes, it can, although paying policy premiums through a company doesn’t automatically make them tax-deductible.
For the premiums to be deductible, the arrangement needs to meet HMRC’s normal rules for business expenditure.
The key is why the policy has been taken out, and who benefits from it.
If the premiums are allowable, they reduce the company’s taxable profits and therefore its Corporation Tax liability.
Ask your accountant about the tax treatment before taking out a policy.
Is executive income protection a benefit-in-kind?
Provided the executive policy is owned by the company, and any claim is paid to the company, the premiums aren’t normally treated as a benefit-in-kind for the director or employee.
As a result, the director doesn’t usually pay Income Tax or employee National Insurance on the premiums, and the company wouldn’t normally report them on a P11D.
Of course, if the company pays the premiums on a personal policy owned by the director, this would not be a tax-deductible expense.
What matters is who owns the policy. With executive income protection, the company should own the policy, pay the premiums and receive the benefit.
Do you pay tax if you make a claim?
If your claim is accepted, the insurer normally pays the monthly benefit directly to your limited company.
The company will generally treat those payments as taxable income. It can then use the money to continue paying you while you’re unable to work.
How you’re paid will determine the personal tax treatment:
- Salary or bonus – PAYE and National Insurance apply in the normal way.
- Dividends – the usual company law and dividend tax rules still apply.
- Employer pension contributions – these may be possible where the policy allows relevant employer costs to be covered.
The fact that the money came from an insurance claim doesn’t make subsequent payments to the director tax-free.
Can executive income protection cover dividends?
Often, yes. This is particularly relevant to company directors who take a small PAYE salary and the rest of their income as dividends.
An executive policy may allow both to be included when the insurer calculates how much cover you can have.
Importantly, insurers don’t treat dividends uniformly. They may look at your shareholding, company profits, how regularly dividends have been paid and whether the dividends result from your work for the company.
Some policies can also include employer National Insurance and pension contributions when calculating the benefit.
For more information on how different forms of remuneration are treated, read our guide to salary vs dividends for income protection.
How are benefits taxed for personal income protection?
With personal income protection, the premiums come out of your own pocket.
There’s no Income Tax or Corporation Tax relief on those premiums. You’re paying them from money that’s already been taxed.
The tax position reverses when you claim: personal income protection benefits are normally paid directly to you tax-free.
This can suit someone who wants to own the policy personally or receive any future claim payments directly rather than through their company.
For more information on the differences, read our comparison of executive vs personal income protection.
Which is the more tax-efficient option?
For a company director, executive cover has an obvious attraction: the business pays the premiums rather than you paying them from your own post-tax income.
But you can’t compare the two types of cover on the premiums alone. With executive cover, claim payments go into the company and are generally taxable there. Money subsequently paid to you is then dealt with under the normal tax rules.
Personal cover works the other way around. There’s no tax relief on what you pay in, but a successful claim is normally paid to you tax-free.
Which option works better will depend partly on how you pay yourself and whether you want any claim paid to you directly or through the company.
Can a one-person company use executive income protection?
Yes, absolutely, you don’t need to employ a large workforce to set up this type of policy.
A one-person limited company can potentially arrange executive income protection for its director. The fact that you’re the company’s only director or employee doesn’t, by itself, prevent the company from obtaining cover.
For more information on who can take out a policy, read our guide to executive income protection eligibility.
Does Corporation Tax relief apply automatically?
No. Paying a premium from the company bank account doesn’t automatically turn it into a tax-deductible expense.
As we discussed earlier in this guide, what matters is the policy’s purpose and structure. Your accountant should confirm whether the premiums are deductible based on the type of policy you propose to take out.
What should you check before taking out cover?
Start by making sure you’re comparing like with like. Executive and personal income protection are taxed differently, but tax isn’t the sole consideration.
Check how much of your salary and dividends the policy will cover, how long you’ll wait for payments to start and how long they’ll be paid for.
If you’re looking at executive income protection, speak to your accountant as well as a specialist IFA. Your accountant can check the tax side, while the IFA can compare policies and quotes from different insurers.