Tax on insurance for private healthcare and critical illness
Written by Ray Coman
In the UK, basic healthcare provided by the NHS is 'free at the point of delivery.' It was introduced in 1948 to ensure that everyone in Britain was able to obtain some medical treatment regardless of the level of wealth. Notwithstanding, the private sector exists alongside the NHS as a supplement or substitute for the state provided medical care. This report examines the tax position of private medical insurance and income protection related to critical illness.
Private health insurance covers the cost of medical treatments. The extent of the cover varies between policies.
For an unincorporated body, the cost of health cover for any employees can be deducted from tax-adjusted profits. For the business owner however, the premiums are not tax deductible. It is not regarded by legislation as exclusively for work purposes.
By contrast, a company or LLP can treat health cover as tax deductible. However, premiums paid to insure the health costs of employees and directors is treated as a taxable benefit. In a calculation, it is better for a contractor to pay health insurance personally, because the contractor will need to draw dividends to pay for the income tax. Not only is it more tax efficient to pay health insurance privately, it also avoids compliance requirements.
As a taxable benefit medical insurance is subject to National Insurance. Where a company carried out P11d compliance, this is in the form of Class1A national insurance.
Alternatively, private medical insurance can be provided via salary sacrifice. The cash equivalent of the monthly premium is added to monthly pay. The drawback is that employee’s national insurance is payable on the benefit. However, employee’s NI will only be at 2% where the employee has income above the upper earnings’ threshold. The benefit is that the employer can dispense with P11d reporting, and that the employee’s tax code is simplified. This means that tax deducted ta source is not adjusted to accommodate the additional pay. Salary sacrifice arrangements tend to be more typical for large employers, but either method is fine and the P11d method is slightly more tax efficient.
Usually the taxable benefit is collected via adjustment to the PAYE code of the employee.
The following components of medical insurance are not treated as taxable benefit:
One annual health check-up, or screening test.
Eye tests, glasses and contact lens where required for work. The requirement could arise from health and safety, from driving safely or from monitor or screen work.
Hearing and other disability aids while required for work
Treatment resulting from work related injury.
Overseas medical cover.
There is a tax exemption on the first £500 of medical costs paid to help an employee back to work.
For an unincorporated business eye tests are a tax-deductible expense.
The value of the private medical treatment when it is received is not taxable.
A professional expenses plan is designed to cover the cost of running a practice while the owner is away from work on extended sick leave. The premiums are tax deductible, but benefits received are taxable.
Critical illness covers financial loss resulting from serious illness of an employee. The policy pays a lump sum if the person become seriously ill.
The specific illnesses are usually listed on the policy. The premiums are a benefit in kind, however the payout is not taxable.
This is a supplement to statutory sick pay and is part of the taxable income of the employee. It is a tax deducible expense.