Income protection and tax: the essentials
How tax relief works on income protection
It depends on who pays. If you buy an income protection policy personally and pay from your own taxed income, you cannot claim tax relief on the premiums — but any benefit you receive is generally free of income tax. If a business pays the premium, such as a company paying for a director’s executive income protection or an employer paying for group cover, the premium is often an allowable business expense, but the benefit is then paid through payroll and taxed as earnings.
This guide explains each route with reference to legislation and HMRC guidance. Tax rules can change and depend on individual circumstances; it is information, not tax advice. A qualified accountant or tax adviser can confirm your own position.
Personal policies: no relief, tax-free benefit
Section 735 of the Income Tax (Trading and Other Income) Act 2005 exempts from income tax the benefits paid under qualifying health and employment insurance policies, including individual income protection, provided the premiums were not deductible in calculating anyone’s taxable income. [1] This is the trade-off at the heart of the tax treatment: no relief going in, tax-free coming out.
Because the benefit is tax-free, insurers usually limit the benefit to a share of your gross earnings so that your income while claiming does not exceed your take-home pay. When you compare the benefit with your normal net pay, remember that your normal pay has Income Tax and National Insurance deducted; [5] [6] the benefit does not.
| Who pays | Premium tax relief? | Benefit taxed? | How the benefit is paid |
|---|---|---|---|
| You, personally | No | No — generally tax-free | Directly to you |
| Sole trader’s business | Generally no | No, if no relief was given | Directly to you |
| Limited company (executive income protection) | Usually yes, if wholly and exclusively for the business | Yes, as earnings | To the company, then through payroll |
| Employer (group income protection) | Usually yes | Yes, as earnings | To the employer, then through payroll |
Self-employed and sole traders
If you are a sole trader or in a partnership, a personal income protection policy protects you rather than the business, so HMRC generally does not treat the premium as an allowable business expense. GOV.UK’s guide to self-employed expenses sets out what can be deducted from profits, and personal insurance of this kind is not among the allowable costs. [2]
The upside is the same as for any personal policy: because no relief was given on the premiums, the benefits are generally tax-free under section 735. [1] Some policies for the self-employed cover business overheads separately; their treatment can differ, so check with an accountant. Our guide to income protection for the self-employed covers how cover is set up.
Limited companies and executive income protection
If you run a limited company, the company can take out executive income protection on you as a director or employee. HMRC’s Business Income Manual explains when premiums on policies insuring employees and other key people are deductible: broadly, where the insurance is taken out wholly and exclusively for the purposes of the trade. [3]
HMRC also sets out circumstances where there may be a non-trade purpose — for example, where cover is only for directors who are major shareholders and goes beyond the benefits typically offered to employees of equivalent status. [4] If premiums are deductible, the benefit is paid to the company and passed to the director through payroll, where it is taxed as earnings and subject to National Insurance.
See executive income protection for directors and the tax treatment of business protection.
Group income protection paid by an employer
Employer-paid group income protection usually works in a similar way. The employer typically deducts the premium as a business expense, and any benefit is paid to the employer and passed to the employee through payroll, taxed as earnings. Employers have reporting duties for the benefits they provide; GOV.UK sets out the general rules for expenses and benefits. [7]
See group income protection explained.
If you are both employed and running a side business, or a director who also holds a personal policy, you may have more than one of these routes in place at once. Each policy is treated according to who owns it and who pays, so list them separately when you talk to an accountant.
Insurance Premium Tax
Insurance Premium Tax applies to many general insurance premiums, but long-term insurance such as life cover and most income protection is exempt. [8] This differs from private medical insurance, which is usually subject to Insurance Premium Tax.
Worked illustration: how the routes compare
An illustration helps show why the tax treatment alone does not settle which route is better. The figures below are deliberately general; your own numbers will differ, and an accountant can model them precisely.
Imagine a person who wants a monthly benefit that roughly matches their take-home pay if they were too ill to work. With a personal policy, the premium is paid from income that has already been taxed, so each pound of premium costs a full pound of net pay. If they claim, the benefit arrives with no Income Tax or National Insurance taken off, because section 735 applies. [1] The insurer will usually cap the benefit at a share of gross earnings for exactly that reason.
With executive income protection paid by their limited company, the premium may be deductible for the company, which can make it cheaper in after-tax terms. [3] But a claim pays the company, which then passes the money through payroll, where Income Tax and National Insurance are deducted. To end up with a similar take-home amount, the gross benefit needs to be higher, and insurers set their limits with that in mind. The cover also belongs to the company, so it usually ends if the person leaves or the company closes.
Neither route is a loophole. Each reflects a consistent principle: where tax relief is given on the way in, tax is generally paid on the way out, and where no relief is given, the benefit is generally tax-free. Choosing between them is about ownership, flexibility, how long you expect to keep the role, and your company’s finances, as much as about tax.
Records worth keeping
Whichever route applies, keep the policy schedule, a note of who owns the policy and who pays, and the premium history. If a company pays, keep board minutes or a short note recording why the cover was taken out, since HMRC looks at the purpose of the insurance when deciding whether premiums are deductible. [4] If you later claim, records of who paid will help confirm how the benefit should be taxed. Employers providing group cover should keep their benefits reporting in order. [7] Whichever route applies to you, review it when your circumstances change — for example, when you incorporate a business, take a new job or change how you are paid — because the tax treatment follows who owns the policy and who pays for it, not the policy itself.
Comparing the routes
Which route is “better” depends on your circumstances rather than the tax alone. A personal policy stays with you if you change jobs or close a company, and pays a tax-free benefit. A company-paid policy may cost the business less after tax, but the benefit is taxed and the cover may end if your role ends. [3]
| Point | Personal policy | Company or employer policy |
|---|---|---|
| Who owns the policy | You | The company or employer |
| If you leave the job or close the company | Continues if you keep paying | Usually ends |
| Benefit after tax | Paid gross, tax-free | Taxed through payroll |
| Cost after tax relief | Paid from taxed income | May be deductible for the business |
| Control over terms | You choose | Set by the policyholder |
Before acting, check any adviser or firm on the FCA Register. [9]
Looking at cover with PremierPMI
PremierPMI is a specialist private medical insurance broker and the publisher of The Health Guide. If you want to talk through what this means for your own cover, you can start there.
Or, if you would rather start here, send an enquiry and PremierPMI will contact you.
Common questions
Can I claim tax relief on personal income protection premiums?
Can a sole trader put income protection through the business?
Is executive income protection a tax-deductible expense for my company?
Is income protection benefit taxable?
Do I pay Insurance Premium Tax on income protection?
Is a personal or company-paid policy better for tax?
Sources and methodology
- [1] UK Parliament (legislation.gov.uk). “Income Tax (Trading and Other Income) Act 2005, section 735: health and employment insurance payments”. View source(opens in a new tab)Primary source
- [2] GOV.UK. “Expenses if you’re self-employed”. View source(opens in a new tab)Primary source
- [3] HM Revenue & Customs. “BIM45525: Specific deductions — insurance: employees and other key persons”. View source(opens in a new tab)Primary source
- [4] HM Revenue & Customs. “BIM45530: Specific deductions — insurance: key persons — non-trade purposes”. View source(opens in a new tab)Primary source
- [5] GOV.UK. “Income Tax rates and Personal Allowances”. View source(opens in a new tab)Primary source
- [6] GOV.UK. “National Insurance rates and categories”. View source(opens in a new tab)Primary source
- [7] GOV.UK. “Expenses and benefits for employers”. View source(opens in a new tab)Primary source
- [8] GOV.UK. “Insurance Premium Tax”. View source(opens in a new tab)Primary source
- [9] Financial Conduct Authority. “The Financial Services Register”. View source(opens in a new tab)Primary source
We cite primary sources wherever possible. Read about our sourcing methodology.
Emma Leadbetter
Editor and Copywriter, PremierPMI
- 15 years health, finance and consumer journalism
- PhD candidate, University of Chichester
Emma has written across health, finance and consumer-affairs journalism for more than 15 years, and has been part of the PremierPMI team since 2022. She is known for making complex topics easy to understand, and fact-checks every guide against current insurer wording before it goes live. She is completing a PhD at the University of Chichester researching how the NHS has changed since COVID-19.
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Ilana Eldad
Corporate PMI Specialist, PremierPMI
- ACCA-qualified
- Corporate and SME scheme specialist
Ilana oversees business health insurance schemes for the corporate and SME team, guiding employers from initial quotes through claims and renewal. ACCA-qualified, she applies that financial background to reducing premiums and advising on tax-deductibility, and runs the largest corporate portfolio at PremierPMI.
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