Income Protection

kelly · PayPerShop Newbie Joined: 12 Aug 2004 Posts: 25

Hi,

I'm wondering if anyone knows if Income Protection payments are NI'able? Currently we make payment for this type of cover to our employees via an arrangement which means 'pension' is payable, therefore, non-NI'able. However, this is due to change and the company are looking to make Income Protection payments to employees via the payroll.

Many thanks for your help
Kelly

Ian Congreave · Posted: Fri Mar 21, 2008 8:11 am Post subject: Income protection payments

I have no direct experience of "income protection" payments and, having done a little research, I presume that you are describing a scheme that makes payments to employees when they are unable to work, either due to sickness or for some other reason, and either for a short period, such as occupational sick pay, or long term, such as where the employee is injured or seriously ill and unable to work again.

The tax guidance on this is provided at http://www.hmrc.gov.uk/individuals/taxexemption.htm. The more technical aspects are covered in HMRC's Insurance Policyholder Taxation (IPT) Manual, from page http://www.hmrc.gov.uk/manuals/iptm/IPTM6000.htm onwards. It seems to be a complex subject, to the extent that the legislation, in the Income Tax (Trading and Other Income) Act 2005, includes some tax avoidance measures.

In principle, however, payments to employees from a scheme where the employer is the policyholder are taxable to the extent that the employees themselves have not contributed to the premiums from their after-tax earnings. If the employer fully funds the premiums, the payments are fully taxable on the employees. If the employees pay towards the scheme, tax is only due on the proportion of the payments that they have not funded.

Your question, however, is, are the payments NICable? The general guidance for tax purposes is unhelpful on the question (and is a good example of how HMRC's guidance could be vastly improved by giving tax and NICs guidance together). However, the National Insurance Manual, at page http://www.hmrc.gov.uk/manuals/nimmanual/NIM02345.htm gives the answer. It works in the same way as for tax. If the employer funds the scheme, the payments are NICable in full. If the employees partially fund the scheme, that proportion of the payments to the employees that are funded by the employer are liable for Class 1 NICs.
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kelly · PayPerShop Newbie Joined: 12 Aug 2004 Posts: 25

Thanks Ian, that's exactly what I needed.

Kelly