Executive income protection vs personal income protection

If you run your own limited company, you can take out income protection through the business or buy a personal policy yourself.

The main differences are who pays for the cover, who receives the benefit if you claim, and how each is taxed.

Executive vs personal income protection at a glance

The exact position varies between insurers and depends on how the policy is arranged.

How does executive income protection work?

Executive income protection is taken out by your limited company to cover you as a director or employee.

The company owns the policy and pays the premiums. If a claim is accepted, the monthly benefit is paid to the company after the deferred period.

The business can then use the money to continue paying you while you’re unable to work.

Depending on the insurer, the amount of cover available may be based on:

• PAYE salary;
• dividends arising from your work for the company;
• employer pension contributions; and
• employer National Insurance contributions.

This is particularly relevant to owner-directors who take a relatively small PAYE salary and receive the rest of their income as dividends.

Read more in our guide to salary and dividends.

How does personal income protection work?

A personal income protection policy belongs to you rather than your company.

You pay the premiums yourself, usually from income you’ve already taken from the business. If a claim is accepted, the benefit is paid directly to you and is normally tax-free.

Dividend income can also be included by some insurers when working out how much personal cover a company director can have.

Which is more tax-efficient?

The two types of cover are taxed very differently.

With executive income protection, the premium is paid directly by the company. It may qualify as an allowable business expense for Corporation Tax purposes, depending on how the policy is set up and the reason for taking it out.

The premium isn’t normally treated as a benefit-in-kind where the company owns the executive policy.

Personal income protection is paid for from your own post-tax income, with no personal tax relief on the premiums.

Executive cover can therefore cost less to fund than an equivalent personal premium. But the position changes when a claim is made.

What happens to the claim?

With personal income protection, a successful claim is normally paid directly to you tax-free.

With executive cover, the benefit is paid to your limited company and is generally treated as taxable income within the business. The company can then use the money to continue paying you.

Salary paid to you from the company is taxed through PAYE in the normal way.

So a £4,000 monthly executive benefit isn’t directly comparable with a £4,000 tax-free personal benefit.

Our guide to executive income protection tax looks at the treatment of premiums and claim payments in more detail.

What about the cost of the premiums?

The monthly quote doesn’t reflect the full cost of both options.

An executive premium comes straight from the company. If it’s an allowable business expense, Corporation Tax relief reduces the effective cost.

A personal premium has to be paid from money you’ve already extracted from the company and paid any relevant personal tax on.

That doesn’t necessarily make executive cover the better policy. The amount of cover, tax treatment of a claim and the policy terms also need to be compared.

See our guide to how much executive income protection costs for more on premiums.

Can both cover salary and dividends?

Yes. Both types of policy may allow dividend income to be included as well as salary, although the amount you can cover varies between insurers.

This is particularly relevant if you take a small PAYE salary and most of your income as dividends.

When dividends are included, the amount accepted as insurable income may depend on:

• your shareholding;
• the company’s recent accounts;
• trading profits;
• the level and consistency of dividends;
• whether the dividends arise from your work; and
• whether dividends are shared with another shareholder.

Executive policies may also allow certain employer pension and National Insurance costs to be included in the cover.

Personal policies are generally based on the individual’s income.

Our guide to salary and dividends for income protection looks at this in more detail.

Can executive income protection provide more cover?

Potentially.

Some executive policies allow a higher gross benefit because the money is paid to the company and is generally taxable.

Depending on the insurer, cover of up to a percentage of allowable income may be available, with certain employer National Insurance and pension contributions added on top.

But the headline benefit doesn’t tell you how much you’ll ultimately receive.

A larger benefit paid into the company isn’t necessarily more valuable than a smaller tax-free benefit paid directly to you.

The comparison needs to be based on what would actually be available to support you during a claim.

What happens if you close your company?

A personal policy stays with you if you close your company, change jobs or move into permanent employment.

Executive income protection is different because the policy belongs to the limited company. If the company closes or is sold, the cover may need to be changed or replaced.

Some insurers allow executive cover to continue in another form, but this depends on the policy.

If closing the company is a possibility, check what options you would have before taking out the cover.

Can you have executive and personal cover together?

Yes. You might already have personal income protection and later take out executive cover through your company.

Having two policies doesn’t necessarily mean both will pay their full stated benefits if you claim.

The amount payable may be affected by your earnings and any benefits received from other income protection policies.

Existing cover should therefore be declared when applying for another policy.

Our guide to having more than one income protection policy as a director looks at this separately.

When might executive income protection be more suitable?

Executive cover may be a good fit if:

• you expect to continue trading through your limited company;
• you want the company to pay the premiums;
• you receive a mixture of salary and dividends;
• you want to include certain employer pension or National Insurance costs;
• the executive policy provides the amount and type of cover you need; and
• you’re happy for any claim to be paid through the company.

For an established owner-managed company, paying for income protection through the business can be an attractive option.

When might personal income protection be more suitable?

Personal cover may suit you better if:

• you want to own the policy yourself;
• you expect your working arrangements to change;
• you may close your company;
• you want any claim paid directly to you;
• you already have a good personal policy; or
• the personal cover available has better terms.

Being a limited company director doesn’t mean you have to use executive income protection.

Which should you choose?

Don’t choose between the two options solely based on premium costs.

Check how much of your income each policy will cover, when it starts paying and how long payments can continue. The definition of incapacity is important too.

Executive cover is paid for by the company, while personal cover is paid from your own income. The tax treatment of any claim is also different.

A specialist IFA can compare the available options and how insurers treat salary and dividends.

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