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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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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 2003, the employees each pay £7 per month and the employer pays £6 per month for each employee. From 1 January 2004, the employees’ contributions increase to £8 per month and the employer pays £7 per month per employee.

An employee falls sick on 1 October 2003, and is still ill and receiving sick pay on 1 October 2004.

From 1 October 2003:

6 x sick pay is taxable as employment income
   
6 + 7  

From 1 January 2004:

7 x sick pay is taxable as employment income
   
7 + 8  

As the employee is still receiving sick pay on 1 October 2004 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 2004, the club calculates the employees’ total contributions for the year ended 31 May 2004 to be £40,400, so the employer pays in £59,600. The proportion taxable as employment income is calculated to be:

59,600 x any sick pay paid out of the scheme
   
59,600 + 40,400  

and this proportion is applied from 1 July 2004.

By 30 June 2001, the club calculates the total contributions for the year ended 31 May 2001 as employees £35,700 and employer £64,300. The proportion taxable as employment income is recalculated as:

64,300 x any sick pay paid out of the scheme
   
64,300 + 35,700  

to take effect from 1 July 2005.

On 1 October 2005 the club changes its rules and employees begin to contribute 40p per week, and their employer 70p per week per employee. From 1 October 2005 the proportion of sick pay taxable as employment income can be calculated in accordance with the rules in Example (a) above and is:

70 x any sick pay paid out of the scheme
   
70 + 40