IPTM6145 - Sickness disability and unemployment insurance: action if tax deducted at source by insurer

Payments falling wholly within the scope of the exemption

Where payments from policies fall wholly within the scope of the exemption set out at IPTM6100 to IPTM6115, those payments should be received without tax being deducted by the insurer. This should happen automatically.

However, if for example an insurer was not made aware that an employee had contributed towards premiums paid by their employer, and was therefore unaware that the payments should be wholly or partially exempt, it would deduct tax from the payments.

In this case the policyholder should ask the insurer for form R91 ‘Application for payment of benefits without deduction of tax’. The completed form should be returned to the insurer who will arrange to make future payments without deducting tax and repay any tax that had been unnecessarily deducted.

Alternatively the insurer might correctly deduct tax from the payments but, even taking those payments into account, the policyholder’s income might be below taxable income limits.

In this case, on receipt of a completed form R91, the insurer will arrange to make future payments without deducting tax, but the person will need to contact HMRC to arrange repayments of tax already deducted.

How the insurer recovers amounts of tax which it has repaid

CTM35130 contains details of what the insurer should do where it becomes aware that anything which ought not to have been included in a return under that schedule has been so included.

Payments not falling wholly within the scope of the exemption

Where the employee contributed towards the premiums out of taxed income, a ‘just and reasonable’ proportion of the payment will fall within the exemption. For example, if 10% of the premiums were employee-funded, then 10% of the payment from the policy falls within the exemption and should be made to the individual without a deduction of tax.

Any part of the payment that is not within the exemption (90% in the above example) is taxable as income and the insurer should deduct basic rate tax from it before passing it to the individual.

The taxable part of the payments, when added to the chargeable person’s income, may attract tax at higher/additional rates and should in such cases be reported to HMRC.

Where the individual completes a self-assessment return, the payments should be included within ‘Other taxable income’. If the individual is unsure as to what amounts to include, they should contact their insurer.

If an individual is not within self-assessment and there is additional tax to pay, details of the payments should be sent to HMRC. Information on how to contact HMRC can be found here.

Employer schemes funded by way of salary sacrifice

As set out in IPTM6120, payments out of employer schemes funded by way of a salary sacrifice are not within scope of the exemption.

However, where reliance has been placed on previous guidance provided to the Association of British Insurers (ABI), HMRC will accept that certain payments can be treated as exempt or partly exempt. More details are set out in EIM06474.