EIM06460 - Employment income: sick pay and injury payments: examples

Section 221 ITEPA 2003

Example (a): employees’ and employer’s contributions fixed in advance

Employees and their employer contribute to a sick pay insurance scheme. Until 31 December 2020, the employees each pay £30 per month and the employer pays £20 per month for each employee. From 1 January 2021, the employees’ contributions increase to £35 per month and the employer pays £25 per month per employee.

An employee falls sick on 1 October 2020, and is still ill and receiving sick pay on 1 October 2021.

From 1 October 2020, the amount of sick pay taxable as employment income is given by the formula:

Sick pay × (20 ÷ (20 + 30))

From 1 January 2021, the proportion of sick pay taxable as employment income is given by the formula:

Sick pay × (25 ÷ (25 + 35))

As the employee is still receiving sick pay after a whole year (on 1 October 2021) the part of the sick pay which is not taxable as employment income is potentially chargeable as Savings and Investment Income. Sections 735 – 743 ITTOIA 2005 exempt that part of the sick pay, but not the part taxable as employment income (see above).

Example (b): employees’ or employer’s contribution variable

A sick pay club makes up its accounts to 31 May each year.

The employees each contribute 60p per week, and their employer pays whatever sum is needed to bring the total contributions up to £100,000 per year. Because the number of employees is variable, the relative amount of the employees’ and employer’s contributions will not be known until the end of the year.

By 30 June 2020, the club calculates the employees’ total contributions for the year ended 31 May 2020 to be £40,400, so the employer pays in £59,600. The proportion taxable as employment income is given by the formula:

Sick pay × (59,600 ÷ (59,600 + 40,400))

This proportion is applied from 1 July 2020.

By 30 June 2021, the club calculates the total contributions for the year ended 31 May 2021 as employees £35,700 and employer £64,300. The proportion taxable as employment income is recalculated as:

Sick pay × (64,300 ÷ (64,300 + 35,700))

This proportion takes effect from 1 July 2021.

On 1 October 2021 the club changes its rules and employees begin to contribute 40p per week, and their employer 70p per week per employee. From 1 October 2021 the proportion of sick pay taxable as employment income can be calculated in accordance with the rules in Example (a) above and is given by the formula:

Sick pay × (70 ÷ (70 + 40))

Using a Salary Sacrifice

For instances where an employer provides income protection policies through a salary sacrifice arrangement with their employees see guidance at EIM06470.