Income protection: Are premiums tax-deductible?

Is Income Protection Insurance Tax Deductible in the UK?

In these challenging economic times, paying for income protection can be a smart financial move. Income protection insurance is designed to give you peace of mind, knowing that your personal and business bills could be covered if your circumstances changed.

If you are a company director, you may prefer to have your business fund the premiums. If you go down this route, there are a few important questions to answer before proceeding.

Let’s explore your options and how income protection insurance can be claimed as a tax-deductible expense.

Personal or business plan?

Your choice between a personal income protection plan or an executive plan directly affects your ability to claim tax relief. If you choose a personal plan, premiums are paid from your net income, meaning you’ve already paid tax at source. However, any benefits paid under the policy are generally tax-free.

Conversely, if you pay premiums through your limited company (as a director), an executive income protection plan is usually preferable. This approach allows you to claim the premiums as a tax-deductible expense, which can reduce your company’s taxable profits.

How executive plans work

An executive or director’s plan allows premiums to be claimed as a legitimate business expense. Payouts go to the business rather than your personal account, and the insurance payment is then distributed as income subject to tax.

Another benefit of executive plans is that insurers often allow you to cover up to 80% of gross earnings, compared to a maximum of 60% with a personal plan. This higher coverage compensates for the tax-deductible nature of the premiums.

Navigating the tax minefield

The UK Government provides guidance on tax relief, but it can be confusing. As the overview shows, you have options when it comes to claiming tax deductions on income protection premiums. It is always wise to get professional confirmation of the tax implications before signing up for a policy.

WIS Mortgages and Insurance are here to help — get in touch for free advice on income protection, critical illness cover, and life insurance options.

FAQs about Income Protection and Tax Relief

Is income protection insurance tax deductible in the UK?

Yes, in certain cases. Executive plans paid through a limited company may be considered a business expense and are often tax deductible. Personal income protection premiums are generally not tax deductible.

Do I need to pay tax on income protection payouts?

If you pay for the policy personally, benefits are usually tax-free. If the business pays for the policy, payouts may be treated as taxable income.

Can company directors claim income protection premiums as a business expense?

Yes. Directors can often claim premiums as a legitimate business expense if the policy is structured as an executive income protection plan.