This guidance tells you about a special tax exemption for payments made under some insurance policies in times of unemployment, sickness, disability, infirmity, or when there is a need for long-term care.
Further information may be found in the Inland Revenue’s Assessment Procedures Manual (AP1032 to AP1041).
You may have taken out insurance to pay particular bills, or to provide you with cash if you become sick or unemployed. In many cases, there is no tax to pay on benefits received under these types of insurance policies. This guidance tells you:
The word 'benefits' in this document means amounts paid out under an insurance policy.
The word 'sickness' also means disability, infirmity and the need for long-term care.
This guidance does not cover life insurance policies, capital redemption policies or life annuities. Life insurance provides financial protection if you die, but many policies are also investments so they have their own special tax rules. Capital redemption policies are a special type of investment policy. Life annuities provide income whether or not you are sick or unemployed.
Your Inland Revenue office will be able to help if you want to know about the taxation of life insurance policies, capital redemption policies and life annuities.
Even if your policy is called life insurance or critical illness insurance it may also pay regular sickness benefits if you are ill. If your policy provides more than one type of insurance, for example, life insurance and sickness cover, see question 4.
The most common types of policies that pay benefits that may be tax free are:
The answers to questions 12-16 tell you when benefits from these types of policy are not tax free.
Yes. The words 'policy' and 'insurance' in this document apply to cover provided through membership of a friendly society.
Yes. Policies which pay benefits if your husband or wife becomes sick or unemployed, and those which cover people who are jointly responsible with you for a mortgage or other debt can come within the exemption.
Yes. The part of the policy providing sickness or unemployment benefits is treated as if it were entirely separate from the other part of the policy.
Yes.
Yes. Some policies pay benefits to top up earnings which are reduced following sickness or unemployment. These benefits can be tax free.
No
Benefits paid under creditor insurance (see question 1) are tax free whenever they were paid. For all other types of policy, benefits paid after 5 April 1996 are tax free.
No, but see questions 17 and 18 if your employer, or former employer, paid for your premiums.
There is no tax to pay on this sort of lump sum unless:
Ask your Inland Revenue office for help if you are not sure whether or not your lump sum is taxable.
Your lump sum will be tax free unless it falls within the categories listed in question 10. Even if it does, there are special rules that exempt many of these lump sums from tax. Your Inland Revenue office will be able to tell you about these rules.
Benefits are not tax free if:
The main conditions are:
When the premiums are a tax deductible business expense. Ask your Inland Revenue office if you are not sure if your benefits are business receipts.
There are three main rules:
Ask your insurer or Inland Revenue office for advice if you think that any of these rules may apply to you.
Long-term care insurance is a name used to describe many
different types of insurance which provide for the cost of
long-term care. Some are life insurance policies or are life
annuities which have their own special tax rules, as explained
at the beginning of this document. Others do not meet the
conditions set out in question 13 because they are not taken
out before the need for care arises.
If long-term care insurance benefits are not within this exemption, it does
not necessarily mean that the benefits are taxable. Some policies are designed
in such a way that the benefits do not count as the insured person's income
for tax purposes anyway and, for other reasons, benefits paid under life insurance
policies may not be taxable.
Ask your insurer or Inland Revenue office for advice if you are not sure if your long-term care benefits are taxable.
Yes. Benefits that come to you from an employer's scheme are treated as part of your earnings, and are taxed in the normal way (but see questions 19 and 20 if you contributed to, or were taxed on, your employer's premiums).
Yes. You may be receiving benefits directly from an insurer under a 'new' policy written in your name. These benefits are also liable to tax. This is because your 'new' policy is linked to the policy paid for by your former employer.
If you contributed to, or were taxed on, your former employer's premiums, see questions 19 and 20.
If you paid a proportion of the premiums that relate to you under your employer's scheme, the same proportion of any benefits which you receive will be tax free. So, if you paid one quarter of the premiums, one quarter of your benefits will be tax free, and three quarters will be taxable. This also applies if you continue to receive benefits after you have left the employment.
If you receive your benefits directly from an insurer because you left the employment, an insurer might deduct tax at the basic rate from the amount paid to you. This is because the insurer will not know that you contributed towards the premiums paid by your employer. If this happens, tell the insurer that you contributed to the premiums and ask for form R91 'Application for payments of benefits without deduction of tax'. The insurer will make arrangements to pay your benefits without deducting any tax and repay any tax deducted that was not due.
You must tell your Inland Revenue office about the portion of your benefits which is taxable and if an insurer makes a repayment to you.
Yes. Your benefits will be exempt because, effectively, you paid the premiums out of your taxed income.
Not necessarily. You will have to pay additional tax if you are liable at higher rates of tax when your insurance benefits are added to the rest of your income.
You may be able to claim a repayment of tax if :
Your Inland Revenue office will tell you how to claim any repayment of tax. If you do not pay tax because your taxable income is completely covered by your tax allowances, ask the insurer for form R91. The insurer may be able to pay your benefits without deducting any tax to save you the trouble of reclaiming it from the Inland Revenue.
You must tell your Inland Revenue office if you receive any insurance benefits which are taxable. If you receive a tax return, you should include in it the amount of your benefits which are taxable, even if the insurer has deducted the basic rate of tax from your benefits.
If you do not receive a tax return, but are liable to tax, write and tell your Inland Revenue office about your benefits.
This guidance may not cover all your queries, so if you
have any further questions, please contact your Inland Revenue
office or Enquiry Centre.
