Some of our clients are employees. Others are contractors or run businesses.  As a consequence, we are sometimes asked if a limited company can pay income protection premiums. The answer is yes. Income protection premiums can actually be paid out of personal, after tax income or by a limited company.

In terms of which method is the most cost effective comes down to the tax implications of the type of plan chosen. There are essentially 3 different types of policies: individual, executive or group schemes.  We only deal with personal plans, but it’s worthwhile looking at both personal and group schemes in the context of the current discussion.

The most common type of policy in the UK is a personal income protection plan. As the name suggests these plans are owned by individuals and the premiums are paid from a personal bank account, out of after tax income. Under current regulations, any benefit received from the policy would be exempt from income tax.

However if you want an individual plan and operate a limited company you can choose to pay the premiums through the company. This would mean the premiums are paid from the applicable business account. Providing premiums are disclosed as a P11D benefit and taxed accordingly, any benefit would still be exempt from tax. However it may not be possible to class the premiums as a business expense. This would be a matter of opinion and would come down to the view of the   relevant HMRC inspector although your accountant would also have a viewpoint.

The tax treatment of executive plans is quite different. But these plans work well where a company wishes to provide cover to a small number of staff or executives. This type of plan is owned by the business so any benefit is paid to the business to distribute as it wants. However the benefit is classed as a receipt and would be taxed accordingly. This means cover has to be grossed up to provide sufficient income. Again whether the premiums can be classed as a business expense would be a matter of opinion.