How does income protection tax work for directors?

The tax treatment of income protection depends on who pays the premiums and how the benefits are received. Directors have two main options: paying for the policy personally, or arranging it through their limited company. The structure you choose determines whether you receive tax relief on the premiums and whether any claim payout is taxable.

Premiums paid by the company

If your company takes out an executive income protection policy, HMRC normally allows the premiums to be treated as an allowable business expense. This means the cost can be deducted when calculating your company’s Corporation Tax liability (GOV.UK – Corporation Tax), reducing the overall tax bill. Because the policy is taken out for business purposes – to protect the company against the financial impact of a director or key employee being unable to work – there is usually no benefit-in-kind charge for the insured person.

When the company pays the premiums, any benefit paid following a claim is received by the business. The payout is treated as trading income and is subject to Corporation Tax in the company accounts. The company can then use the funds to continue paying the director’s salary or dividends, which will be taxed in the normal way under PAYE or Self Assessment (GOV.UK – Self Assessment). This structure ensures business continuity while keeping the tax treatment consistent with ordinary remuneration.

Some insurers allow the company to cover additional costs such as employer pension contributions or National Insurance, which can be particularly valuable for small limited companies where the director’s income is the main operating expense. For a detailed comparison of executive and personal cover, see income protection vs critical illness cover.

Premiums paid personally

If you pay for income protection out of your own pocket, there is no tax relief available on the premiums. However, the advantage is that any benefits paid out are received tax-free. This is because the premiums were funded from income on which you’ve already paid tax. For most personal income protection plans, the policy can cover around 60% to 65% of your regular income, and payments continue until you recover or reach the end of your chosen benefit term.

Personal policies are often preferred by sole traders or directors who take minimal salary and higher dividends, as it avoids company-level taxation on a future payout. However, it’s important to balance this against the lack of Corporation Tax relief and the reduced level of cover compared to an executive plan. You can learn more about how much cover is appropriate in how much income protection do you need?.

No benefit-in-kind

Unlike some other employee benefits, executive income protection is not normally classed as a benefit-in-kind. As long as the policy is taken out for genuine business purposes and covers an employee (including a director), there’s no need to report it on a P11D form (GOV.UK – Expenses and benefits), and neither you nor the company will pay additional National Insurance. This makes it one of the most tax-efficient ways for a business to provide income protection to its key personnel.

It’s worth noting that if HMRC believes the policy was arranged primarily for personal reasons – for example, with an excessive benefit level or covering non-business partners – they could disallow the deduction. For that reason, always make sure your accountant or adviser reviews the policy wording before it’s set up to confirm it meets the “wholly and exclusively” test for business expenses (HMRC Business Income Manual – BIM46035).

In summary: Paying through the company is usually more tax-efficient overall, but you’ll need to account for Corporation Tax on any payout. Paying personally means no upfront tax relief, but any benefit received is entirely tax-free. The right choice depends on your income structure, trading setup, and how you prefer to manage future claims. For tailored guidance, it’s worth speaking to a regulated financial adviser (FCA Register) or comparing options via our income protection quote form.