Is income protection insurance taxable in the UK?

Full answer

Income protection insurance pays a regular monthly income if you cannot work due to illness or injury, typically until you recover, retire, or the policy term ends. The tax treatment depends entirely on who pays the premiums. For a personal (individual) policy that you arrange and pay for from your own taxed income, you get no Income Tax relief on the premiums. In return, HMRC treats any benefit you receive as tax-free - it is not added to your taxable income, so you keep 100% of the payout. This is why personal policies are usually set to replace only a portion of your normal earnings (often around 50% to 65%), since the tax-free benefit is compared with what was previously after-tax income. For employer-arranged group income protection, the position reverses. The employer pays the premiums, which are generally a deductible business expense and are normally not treated as a taxable benefit-in-kind on the employee. However, when a claim is paid, the benefit is routed through the employer's payroll and taxed as employment income under PAYE, subject to Income Tax and potentially Class 1 National Insurance. For 2026/27 that means it falls into the normal bands - 20% basic rate above the GBP 12,570 personal allowance, 40% higher rate above GBP 50,270 gross - and employee NI of 8% applies between GBP 12,570 and GBP 50,270, then 2% above. Who does this affect? Self-employed people and employees without workplace cover typically take personal policies for tax-free protection; employees with a group scheme get cheaper or free cover but taxable payouts. Self-employed people should note income protection differs from critical illness cover and from sick pay. To see how a taxable employer payout would be reduced after Income Tax and National Insurance, use the take-home pay or income tax calculator.

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