Do I Pay Tax On Income Protection Payments?

Income protection is designed to replace a percentage of your income if you’re unable to work due to illness or injury. It is as a financial safety net to fall back on  when you’re in need of a little support to keep family life ticking over as normal in difficult times. With that in mind, you’ll probably want to be aware of any tax implications that come with income protection.

It won’t be news to any working adult in the UK that we are essentially taxed every time we breathe, eat and sleep - and not even insurance products are spared being taxed. This includes income protection, however it’s not as black and white as that. With income protection, the tax depends on who is paying the premiums for your policy - you, your employer or a bit of both.

Let’s look at the different possible situations here. If you took it upon yourself to take out your own income protection insurance then it’s pretty simple - you were the one who purchased the cover and all of the payments that you receive from this property are yours to keep.

In the eyes of the taxman, you’ve paid for the premiums yourself from your net income at the source, so the policy has effectively already been taxed and the taxman has had his bit one way or another. This is why most insurers generally only allow you to insure 65% of your gross income, as it works out as approximately the same as your net income. 

If you have income protection as a benefit in your employment package, it’s often your employer that’ll be paying the premiums - that’s the idea of it being a benefit! They’re usually a tax deductible business expense, which means that they are a cost that can be subtracted from a company’s income before it’s subject to taxation. This means that the policy hasn’t been taxed at the payment stage, so is generally taxable as income on a claim. 

What if I’m not sure?
It’s possible that you could be paying towards an income protection policy out of your salary without even knowing. It’s definitely worth finding this out if you’re considering taking out an income protection policy of your own so that you don’t end up duplicating cover and ultimately wasting your precious pennies.