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HMRC internal manual

Insurance Policyholder Taxation Manual

HM Revenue & Customs
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Sickness disability and unemployment insurance: tax treatment from 6 April 1996: employer’s schemes and other situations where someone else has paid part of the premiums

The exemption applies only to payments to the insured person. But, for example, wherean employer has an insurance policy to cover sick pay to employees - an employer’sscheme - the employer is the insured, because the employer holds the contractwith the insurer. More details at IPTM1110.

It follows that without a special rule, even where the employees have paid the premiums,their sick pay would be taxable as employment income.

Employer’s schemes and other situations where someone else has paid part of thepremiums: ITTOIA05/S743

Where a number of people contribute towards the premiums, they can each benefit fromthe exemption in ITTOIA05/S735. This extension to the main rules is aimedparticularly at employer’s schemes, but it can apply in other circumstances.

ITTOIA05/S743 does two things. First, where a policy is taken out

  • by one person wholly or partly for the benefit of another, and
  • that other person contributed to the premiums, as defined below

then the exemption applies to a ‘just and reasonable’ part of the paymentsreceived by that other person. In the case of sick pay, for example, this means that itwould be free of tax in proportion to the extent to which the employee had paid thepremiums. Secondly, that other person is treated as the insured person under the policy inrelation to the tax-free part of the payments that they receive.

Any part of the payments they receive that do not qualify for the exemption will be taxedas employment income.

Where the employment ends because of health reasons see IPTM6125.

Contribution to premiums

The condition in ITTOIA05/S735 that the insured person did not receiveincome tax relief for the premiums paid for the policy still applies - see IPTM6110.

For example, in an employer scheme, any amount that the employer recovers from theemployee is to be treated as payment of an appropriate part of the premium by theemployee, provided that it is recovered from their income after tax.

The provision of an employer’s scheme does not constitute a taxable benefit for theemployee - EIM21820. If it were taxed as a benefit the employee wouldhave, in effect, paid the premium out of taxed income. Payments received under the policywould therefore be exempt.

Tax treatment: employer

The tax treatment of premiums and payments received from insurance policies byemployers is not dealt with in this manual. Guidance on whether a payment from aninsurance policy is a trade receipt is at BIM40750. Guidance on whetherpayment of a premium is an allowable deduction is at BIM45500.

Further reference and feedback IPTM1013