Is Disability Income Insurance Tax Deductible

Disability income insurance, often referred to as income protection insurance in the UK, provides a financial safety net if illness or injury prevents you from working. It’s a valuable policy for many individuals, particularly the self-employed and company directors. But can the cost of this insurance be claimed as a tax-deductible expense?

In short, the answer depends on who the policy protects, who pays for it, and how any payout is structured. HMRC has strict rules on whether premiums are deductible and whether benefits are taxable. This article explains those rules for employees, the self-employed, and business owners.

What Is Disability Income Insurance?

In the UK, disability income insurance is better known as income protection insurance. It provides a regular income if you are unable to work due to long-term sickness or disability. Policies typically cover a percentage of your earnings, usually up to 50–70 percent, after an initial waiting period.

You can take out a personal income protection policy, or if you are a company director, your limited company may arrange a policy on your behalf. The way these premiums are paid will determine how they are treated for tax purposes.

Are Personal Income Protection Premiums Tax Deductible?

If you take out an income protection policy personally, the cost of the premiums is not tax deductible. This applies whether you are:

• Employed

• Self-employed

• A company director paying from your own post-tax income

From HMRC’s point of view, this is a private insurance policy, much like life insurance or private medical cover. The premiums are paid from your net income and do not reduce your taxable profits or salary.

However, the upside is that if you ever receive payments from the policy, they are tax-free. Because no tax relief was granted on the premiums, HMRC does not tax the benefit.

This is an important consideration. You do not get tax relief on personal premiums, but the income received under the policy, when triggered, is not added to your taxable income.

What About Self-Employed Individuals?

If you are self-employed, you might assume that income protection insurance qualifies as a business expense. After all, it protects your ability to earn.

Unfortunately, that’s not how HMRC sees it. Income protection insurance is still classed as a personal expense, even for sole traders or business partners. It is not considered an allowable deduction when calculating profits for income tax purposes.

You can still take out the cover, but it must be funded from your taxed earnings. You cannot claim the cost of the policy against your business income or include it on your Self Assessment return as a deductible expense.

Company-Paid Policies: When Might Premiums Be Deductible?

There is one possible route where premiums may be tax deductible, but it comes with a trade-off.

If you run a limited company, the business can pay for an income protection policy that covers you as a director or employee. If structured properly, these are known as executive income protection policies.

When paid by the company:

• The premiums may be classed as an allowable business expense for Corporation Tax purposes

• The cost is not usually treated as a benefit in kind for the employee or director

• However, any payouts made under the policy are taxable as income, because the premiums received tax relief

This means the benefit of the deduction comes up front, but the tax is paid later, once the policy pays out.

The company should take professional advice when arranging this kind of policy, as it must meet HMRC’s conditions to be treated as tax-efficient. The policy must:

• Be written in the company’s name

• Cover an employee or director

• Provide payments to the company or the individual as salary, taxed in the usual way

Many insurers offer specialised executive income protection plans that are set up to meet these rules.

What If You Are Both Employer and Employee?

Many company directors fall into this category. You are both the person taking out the insurance and the person the business is protecting.

If your company pays for the policy and claims tax relief, and the policy provides a regular income to you if you are unable to work, that income is subject to PAYE and National Insurance in the usual way. It must be recorded on the payroll as part of your earnings.

In contrast, if you take out the policy personally, there is no tax relief, but the income is not taxed.

The decision is therefore about cash flow and timing. Do you want relief now and tax later, or no relief now and tax-free benefits in future?

Group Income Protection Schemes

Larger employers may offer group income protection as part of an employee benefits package. These schemes are arranged by the employer, cover multiple staff, and often form part of a wider health and wellbeing plan.

In this context:

• Premiums are usually tax deductible for the employer

• The benefit may be taxed depending on how it is structured

• The employee does not pay tax on the premium, but income may be taxed if paid directly to them

Again, the employer gets tax relief on the cost of the cover, but employees may pay tax on the payout unless the policy is structured to deliver payments indirectly.

For most small business owners and self-employed individuals, group schemes are not applicable, but the principles remain the same.

Capital vs Revenue Treatment

Income protection premiums are generally treated as revenue expenses, not capital. This means they are either:

• Deductible in the same accounting period if paid by a company

• Non-deductible if paid personally

There is no depreciation or capital allowance option, as the insurance policy is not a business asset. It is an ongoing cost that either qualifies for relief or not, based on its purpose and who pays for it.

Summary: Is Disability Income Insurance Tax Deductible?

In the UK, the tax treatment of disability income insurance (income protection) depends on the setup:

• Personal policies:

• Premiums are not tax deductible

• Benefits are tax-free when paid

• Company-paid policies:

• Premiums may be tax deductible for the company

• Benefits are taxable as income when received

• Self-employed individuals:

• Premiums are not deductible as business expenses

• Payouts are tax-free

• Group schemes:

• Deductible for employers

• Payouts to employees usually taxed as income

Ultimately, disability income insurance provides important financial protection, but tax relief is not always available. If you are self-employed or a company director, weigh up whether to pay personally or via your business, taking both upfront tax relief and future payout tax into account.

Before making a decision, it is worth discussing your situation with a tax adviser or accountant to ensure the policy structure suits your needs and aligns with HMRC rules.