Is Income Protection Insurance Tax Deductible in the UK?

Income protection insurance can be tax-deductible, however this will depend on your employment status and the type of policy you take out. 

If you’re in employment, a sole trader or don’t own your own limited company and take out a personal income protection plan, then it’s usually not tax-deductible as the premiums paid are out of your own money (which has already been taxed).

The policy will also only pay out a percentage (often up to 70%) of your gross monthly income. Therefore, any successful claims will already have been taxed.

However, those with their own business have the option of taking out executive or group income protection which can be claimed back as a business expense.

This is because the premiums are paid for by the business, so they can be claimed back.

In this article, we will cover everything relating to tax and income protection, including:

  • What is income protection?
  • Do you pay tax on income protection pay outs?
  • What income protection policies are tax deductible?
  • Is personal income protection tax deductible?
  • Is self-employed income protection insurance tax-deductible?
  • Is group income protection tax deductible
  • Is executive income protection tax deductible?
  • How much is income protection insurance?

What is income protection?

Income protection pays a monthly benefit if you’re too ill or injured to work. This will be a percentage of your usual monthly earnings, often up to 70% of your monthly income before tax.

You can purchase cover with a short-term or long-term payment period. If a successful claim is made, short-term cover can pay a monthly benefit up to a maximum of two years. Long-term cover has the potential to pay out until you retire.

If you’re worried financially about being unable to work, or don’t benefit from traditional sick pay benefits, income protection can be an attractive policy to secure.

Do you pay tax on income protection pay outs?

No, you’re not liable to pay any tax on most income protection pay outs.

This is providing your income protection insurance payments (premiums) are being made from your personal bank account.

Your premiums are monthly instalments you pay from your own money which has already been taxed by HMRC.

Therefore, any successful claims will be tax-free. Essentially, if you’re the beneficiary of an income protection policy, you won’t be taxed.

Group income protection should also be tax-free for the beneficiary. However, it would be subject to corporation tax for the business who provides it.

Executive income protection is taxable for the business supplying it. It’s taxed under business revenue. However, this can be claimed back as a business expense as the premiums are paid for by the business.

What income protection policies are tax deductible?

The table below shows whether a product is eligible for an income protection insurance tax deduction:

Type of income protectionCan be secured through Reassured Advice?Tax deductible?
Personal income protectionX
Self-employed income protectionX
Group income protectionX
Executive income protectionX

Essentially, if you’re paying for your own personal income protection, it’s not tax deductible as the money you use to pay for the policy has already been taxed by HMRC.

If you own your own business and take out group or executive income protection, it’s tax deductible as the premiums will be paid for by the company and can be classed as a business expense. 

Is personal income protection tax deductible?

No, personal income protection isn’t tax deductible.

Personal income protection is a standard income protection plan, designed for one person, and premiums are paid from your personal bank account.

As you pay for your cover using your taxed earnings, the amount paid out to you will be tax free and won’t be deductible.

Is self-employed income protection insurance tax deductible?

Yes, income protection for the self-employed can be tax deductible when taking out an executive income protection policy.

This is a policy where the premiums are paid for by your limited company and, therefore, can be claimed as a business expense.

If you take out a personal income protection policy, you won’t be able to claim the premiums as a business expense as they are paid for out of your own money.

If you’re a sole trader and you’re not under a limited company, you’ll be unable to claim your income protection as a business-expense, meaning it wouldn’t be tax deductible.

Is group income protection tax deductible?

Yes, group income protection is tax deductible for any business who pays an impacted employee .

Group income protection is a policy which is provided as an employee benefit by an employer and covers multiple staff members.

If an employee becomes too ill or injured to work, they’ll receive a monthly benefit.

As well as covering a salary, it can also cover an employee’s pension and national insurance contributions.

Group income protection will be tax deductible for the business providing the benefit, but not tax deductible for the employee who receives the benefit as they’re not paying the premiums.

The payments received by an employee will be tax free.

Is executive income protection tax deductible?

Yes, executive income protection is tax deductible.

While similar to group income protection, benefits are paid directly to the business, instead of an affected employee.

As the policy premiums will be paid for by the business, they can be claimed back as a business expense – making them tax deductible.

If a business chooses to supplement an employee’s income with this, it’s taxed as a trading receipt.

However, a business can decide what’s the best use for the money – either paying an affected employee a monthly benefit, retraining or other factors which have impacted the business.

How much is income protection insurance?

Personal income protection varies in price and there’s no universal amount you’ll pay per month.

The amount you’ll pay is dependent on the following:

  • Your age – You may pay more if you’re older due to the increased risk of health complications. Policies with age-banded premiums mean your premiums will increase each year.
  • Your occupation – Occupations are divided into “class groups”. An occupation which is less hazardous will be in a class group with lower premiums. For example, heavy manual workers, on average, will pay more than administrative staff, due to being in a higher risk class group.
  • Your medical history – Both personal and family medical history are considered, as it may mean you’re more susceptible to needing to claim on an income protection policy. If you have a policy with reviewable premiums and are diagnosed with a new condition, this can impact the premiums you pay.
  • Your smoking status – Smokers will pay more due to the additional health complications that can arise. If you have used any nicotine product in the last 12 months, you are classed as a smoker.
  • Your payment period – Long-term income protection policies will have higher premiums than short-term, due to the potential of paying out up until you retire.
  • Length of policy – A longer policy will have higher premiums, due to the longer length of cover and higher probability of a claim being made.
  • Length of deferred period – The deferred period is the time between making a successful claim and receiving the first monthly benefit. The length varies between 4 weeks to 12 months. The longer the length, the lower your premiums would be as you’ll only receive payments if you’re still unable to work once your deferred period has come to an end.

Premium types are how your policy will be paid:

  • Guaranteed – Remains fixed
  • Reviewable – Premiums may change depending on your circumstances
  • Age-banded – Increase as you get older. 

The table below demonstrates how much personal income protection, through UK broker Reassured Advice, would be for a non-smoker, in good health with an annual income of £30,000. Cover would be up until 65, would have a 13-week deferred period, and a payment period of one year:

AgePremium price per month
20£5.85
25£6.14
30£6.41
35£6.88
40£8.60
45£11.00
50£14.63

Other factors including your budget and amount you require should be considered when applying for income protection, as everyone has different personal requirements and circumstances.

The premiums on a quote are determined once an application has been completed.

The best income protection insurance UK

Insurance providerPercentage of income paid outMaximum monthly benefitPayment PeriodDefinition of incapacityPremium type
AegonUp to 65%£20,833Limited term up to 24 months, or full termOwn occupationGuaranteed premiums
AIGUp to 60%£20,833Limited term up to 24 months, or full termOwn occupation, suited occupation or work tasksGuaranteed premiums
AvivaUp to 65%£20,000Limited term of 12 or 24 months, or full termOwn occupationGuaranteed or reviewable premiums
Cirencester FriendlyUp to 65%£52,000 (per year)Full termOwn occupation, suited occupation or work tasksGuaranteed or age-banded premiums
Legal & GeneralUp to 60%£20,000Limited term up to 12 months, or full termOwn occupationGuaranteed premiums
LV=Up to 60%£20,833Limited term of 12 or 24 months, or full termOwn occupationGuaranteed or reviewable premiums
The ExeterUp to 60%£10,000Limited term of 2 or 5 years, or full termOwn occupationGuaranteed or age-banded premiums

Income protection insurance quotes

Hopefully, this article has helped you understand which income protection policies are tax deductible, whilst also informing you on the numerous benefits of this cover.

Income protection quotes start from just 20p a day and can provide much needed peace of mind in an ever-changing world.

If the last two years of the COVID-19 pandemic has taught us anything it is to provision for the future and prepare for the unexpected – especially if you have young children who rely on you.

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