Income protection: Are premiums tax-deductible?

In these challenging economic times, it is abundantly clear that paying for income protection could prove to be a smart move and it is an insurance product that is designed to provide a level of comfort when you know that your personal and business bills could be covered if your circumstances changed.

If you are a company director, you may prefer to choose the option of your business funding the premiums, and if you choose this route, there are a number of key questions that need to be answered before you go ahead.

Let’s take a look at your options and whether you might be able to claim premiums as a tax-deductible expense.

Personal or business plan?

Your decision to take out a personal income protection plan or an executive plan will have a direct impact on your ability to claim tax relief and it is important to understand the distinction between the two options.

If you opt for a personal income protection plan the premiums will be paid from your net income, therefore, you will have already paid tax at source. However, it should be noted that if you make a claim under the policy the benefit payable to you will be paid tax-free.

Conversely, if your preferred option is to pay your income protection premiums through your limited company (if you are a director) it is generally considered to be a more viable option to choose an executive income protection plan as opposed to a personal plan.

This allows you the opportunity to claim income protection insurance as a tax-deductible expense.

Here is a look at how that works

In basic terms, an executive or director’s plan allows you the ability to claim the premiums as a justifiable business expense and when you make a claim against the policy the payout would go to the business and not into your personal account.

The insurance payment is then distributed as income, which would be subject to tax.

Another positive point to bear in mind about an executive plan is the fact that insurers will often allow you to cover up to a maximum of 80% of your gross earnings, whereas your gross earnings are capped at 60% with a personal income protection plan.

The fundamental reason for this disparity is down to your need to insure to a higher level in order to compensate for the tax deduction against your income.

Helping you through the tax minefield

The UK Government offers some useful insights into the subject of tax relief on its website, but you can be forgiven for feeling that it is not always crystal clear what you can and can’t claim for, even when it’s written down in black and white in front of you.

As you can see from the overview we have provided, you do have options when it comes to tax deductions on premiums, but it is often wise to get professional confirmation of the tax implications before you sign up for a policy.

WIS Mortgages and Insurance are here to help, so please get in touch for free advice on your income protection choices and other options such as critical illness cover and life insurance.

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