IPTM6120 - Sickness disability and unemployment insurance: tax treatment: employer’s schemes and other situations where someone else has paid part of the premiums: ITTOIA05/S743

The exemption provided by ITTOIA05/S735 applies only to payments to the insured person. But, for example, where an employer has an insurance policy to cover sick pay to employees – an employer’s scheme – the employer is the insured, because the employer holds the contract with the insurer.

It follows that without a special rule, even where the employees have paid the premiums, their sick pay would be taxable as annual payments under ITTOIA05/S684. ITTOIA05/S743 provides an exemption from tax in such circumstances. A parallel exemption from liability to income tax as employment income is provided under ITEPA03/S325A.

Employer’s schemes and other situations where someone else has paid part of the premiums: ITTOIA05/S743

Where a number of people contribute towards the premiums, they can each benefit from the exemption in ITTOIA05/S735. This extension to the main rules is aimed particularly at employer’s schemes, but it can apply in other circumstances.

ITTOIA05/S743 does two things. First, where a policy is taken out

• by one person wholly or partly for the benefit of another, and
• that other person contributed to the premiums, as defined below

then the exemption applies to a ‘just and reasonable’ part of the payments received by that other person. In the case of sick pay, for example, this means that it would be free of tax in proportion to the extent to which the employee had paid the premiums. Secondly, that other person is treated as the insured person under the policy in relation to the tax-free part of the payments that they receive.

Any part of the payments they receive that do not qualify for the exemption will be taxed as employment income.

IPTM6125 outlines the treatment of payments made where the employment ends because of health reasons and where benefits continue to be paid.

Contribution to premiums

The condition in ITTOIA05/S735 that the insured person did not receive income tax relief for the premiums paid for the policy still applies - see IPTM6110.

For example, in an employer scheme, any amount that the employer recovers from the employee is to be treated as payment of an appropriate part of the premium by the employee, provided that it is recovered from their income after tax.

The provision of an employer’s scheme does not constitute a taxable benefit for the employee unless it is provided under optional remuneration arrangements (OpRA) – see EIM21820 and EIM06471.

Tax treatment: employer

The tax treatment of premiums and payments received from insurance policies by employers is not dealt with in this manual. Guidance on whether a payment from an insurance policy is a trade receipt is at BIM40750. Guidance on whether payment of a premium is an allowable deduction is at BIM45500.

Employer schemes funded by way of salary sacrifice

Amounts funded by way of a salary sacrifice under OpRA by the employee do not qualify as an employee contribution to premiums. The employee is no longer entitled to the salary foregone so while the employer may use the salary foregone to fund the scheme this would be an employer contribution, not an employee contribution – see EIM06470 onwards.

For treatment of payments where customers have relied upon the guidance issued to the Association of British Insurers (ABI) on 15 October 2019, see EIM06474.