HMRC internal manual

Employment Income Manual

Employment income: sick pay and injury payments: sick pay funded by the employer - permanent health insurance

Sections 62 and 221 ITEPA 2003

The employer may provide the funds for sick pay directly or through a trust or insurance policy. Whichever method is used, the sums paid to employees are taxable as earnings within Section 62 or Section 221 ITEPA 2003.

If the employer enters into an arrangement to insure any costs arising from his liability to provide sick-pay this is merely a funding arrangement. Money flows from the insurer to the employer who then pays out sums to the employee as sick pay. Sick pay received by the employee in these circumstances falls within the definition of “earnings” provided by Section 62 ITEPA.

Alternatively, the insurer may choose to pay sums directly to the employee rather than providing the funding to the employer. If there is any dispute about the scope of “earnings” in such cases then Section 221 provides a clear charging mechanism

As the amount to be taxed is the same in either case it will not usually be necessary to decide which section applies. However, Section 221 covers the situation where the employee may have contributed to the fund that provides the sick pay. In such cases only that part of the sick pay attributable to the employer’s contributions are charged to income tax.

The sick pay is taxable whether it is paid to the employee or a member of their family or household. In this context this means the employee’s spouse, the employee’s children and their spouses, and the employee’s parents and dependants.

Where sick pay is provided under arrangements between the employer and an insurance company or by some other third party fund, the right to receive sick pay or the prospect of receiving it is not a benefit chargeable under the benefits code (see EIM21820).

Permanent Health Insurance (PHI)

The arrangements described above may be distinguished from Permanent Health Insurance (PHI) sometimes known as “income replacement” schemes. PHI arrangements create entitlement for individual employees who are unable to work because of illness or disability – see the Insurance Policyholder Taxation Manual at IPTM6100 and subsequent.