By Daniel Gallon 23 July 2021.
This week, the Government published the ‘Health is Everyone’s Business’ green paper on how to improve employee health and reduce workplace sickness absence. The response and the Government’s commitment to working with industry to promote the value to employers, and the self-employed, of the benefits of protection insurance products is welcome. For those interested in reading more on the green paper, an article from my colleague Will Meredew explains more.
However, this ambition is fundamentally at odds with HMRC’s approach to the taxation of Group Income Protection policies. Tax changes that came into force in 2017 currently disincentivise the take up of such insurance through the workplace, which can provide health and rehabilitation services that help keep employees healthy and in work.
Group Income Protection is a safety net for both businesses and staff. If you have a family and a mortgage for example, it provides peace of mind that if you were to be off work for a long period due to ill health, you would receive an income.
On a personal note, when I had a younger family, the tax treatment of Group Income Protection encouraged me to maximise the cover possible while minimising the upfront cost. This was structured as a core policy paid by my employer with an additional flexible benefit that was subtracted from my monthly salary. Neither the employer-funded premiums nor the payment I sacrificed from my salary were taxed. If I had needed to make a claim – although, luckily, I never did – the payout would have been taxed as income under the usual PAYE rules. It was a deal that worked for myself, for DWP given it reduced the chance of me needing to claim benefits, and it worked for HMT as they would receive any tax due at the right time.
It is therefore frustrating that following reforms to the taxation of optional remuneration arrangements in 2017/2018, the tax treatment of employee funded cover (via a salary sacrifice arrangement) has become less favourable and much more complicated.
Please click here to view the full article.