The exemption applies only to payments to the insured person.
But, for example, where an employer has an insurance policy to
cover sick pay to employees - an
employer’s scheme - the employer is the
insured, because the employer holds the contract with the insurer.
More details at
It follows that without a special rule, even where the employees have paid the premiums, their sick pay would be taxable as employment income.
Where a number of people contribute towards the premiums, they
can each benefit from the exemption in
ITTOIA05/S735. This extension to the main rules is
aimed particularly at employer’s schemes, but it can apply in
ITTOIA05/S743 does two things. First, where a policy is taken out
then the exemption applies to a ‘just and
reasonable’ part of the payments received by that other
person. In the case of sick pay, for example, this means that it
would be free of tax in proportion to the extent to which the
employee had paid the premiums. Secondly, that other person is
treated as the insured person under the policy in relation to the
tax-free part of the payments that they receive.
Any part of the payments they receive that do not qualify for the exemption will be taxed as employment income.
Where the employment ends because of health reasons see IPTM6125.
The condition in
ITTOIA05/S735 that the insured person did not
receive income tax relief for the premiums paid for the policy
still applies - see
For example, in an employer scheme, any amount that the employer recovers from the employee is to be treated as payment of an appropriate part of the premium by the employee, provided that it is recovered from their income after tax.
The provision of an employer’s scheme does not constitute a taxable benefit for the employee - EIM21820. If it were taxed as a benefit the employee would have, in effect, paid the premium out of taxed income. Payments received under the policy would therefore be exempt.
The tax treatment of premiums and payments received from insurance policies by employers is not dealt with in this manual. Guidance on whether a payment from an insurance policy is a trade receipt is at BIM40750. Guidance on whether payment of a premium is an allowable deduction is at BIM45500.
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