The employer may provide the funds for sick pay directly or
through a trust or insurance policy. Whichever method is used, the
sums paid to employees are taxable as earnings within Section 62 or
Section 221 ITEPA 2003.
If the employer enters into an arrangement to insure any
costs arising from his liability to provide sick-pay this is merely
a funding arrangement. Money flows from the insurer to the employer
who then pays out sums to the employee as sick pay. Sick pay
received by the employee in these circumstances falls within the
definition of “earnings” provided by Section 62 ITEPA.
Alternatively, the insurer may choose to pay sums directly to
the employee rather than providing the funding to the employer. If
there is any dispute about the scope of “earnings” in
such cases then Section 221 provides a clear charging mechanism
As the amount to be taxed is the same in either case it will
not usually be necessary to decide which section applies. However,
Section 221 covers the situation where the employee may have
contributed to the fund that provides the sick pay. In such cases
only that part of the sick pay attributable to the employer’s
contributions are charged to income tax.
The sick pay is taxable whether it is paid to the employee or
a member of their family or household. In this context this means
the employee's spouse, the employee's children and their spouses,
and the employee's parents and dependants.
Where sick pay is provided under arrangements between the
employer and an insurance company or by some other third party
fund, the right to receive sick pay or the prospect of receiving it
is
not a benefit chargeable under the benefits code
(see
EIM21820).
The arrangements described above may be distinguished from Permanent Health Insurance (PHI) sometimes known as “income replacement” schemes. PHI arrangements create entitlement for individual employees who are unable to work because of illness or disability – see the Insurance Policyholder Taxation Manual at IPTM6100 and subsequent.
