A.) This will depend on whether the policies are personal or company policies and, for the latter, what type of company policy is concerned.
A personal policy would generally provide the directors with tax free income under s735 ITTOIA 2005 providing certain conditions are met. See the Croner-i Direct Tax Reporter at 133-150 and IPTM6000 for HMRC’s guidance.
There is no personal tax relief for such policies. If the company were to pay the premiums, this would give rise to a benefit in kind but would be earnings for employee and employer Class 1 NIC contribution under RTI. The company could claim tax relief for premiums it paid as part of the directors’ remuneration.
There are basically two types of company policy:
• One that can pay the employee directly when they are off work sick.
• One that that provides the company with funds to enable it to continue to pay the employee.
Policies that can pay the employee directly when they are off work sick
Payments to the employee will be taxable as employment income under s221 ITEPA 2003 and so subject to PAYE and Class 1 NIC – see NIM02345.
The premiums are not a benefit in kind owing to s202(1)(c) ITEPA 2003 but will be tax relievable for the company. See the Direct Tax Reporter at 412-590 and EIM06410.
Policies that provide the company with funds to enable it to continue to pay the employee
The insurance proceeds will be taxable income for the company under general principles, but relief will be due for the premiums paid and for payments made to the employee which will be subject to PAYE and Class 1 NIC under RTI. See the Direct Tax Reporter at 708-460 and HMRC’s guidance at BIM45525.
Contributions by the Directors
If the directors contribute towards the premiums on either type of the above company policies, then those contributions can reduce the taxable employment income under s221(4) ITEPA 2003. Only the sickness payments in respect of employer contributions are taxable under s221 – a just and reasonable apportionment is made.
Benefits received that relate to the directors own contributions will be exempt from income tax under s735 ITTOIA 2005 by virtue of s743 ITTOIA 2005. This is also confirmed by s325A ITEPA 2003.
