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Health and taxation policies need to align if we truly want to build a healthier workforce

This week, the Government published the ‘Health is Everyone’s Business’ green paper on how to improve employee health and reduce workplace sickness absence. The response and the Government’s commitment to working with industry to promote the value to employers, and the self-employed, of the benefits of protection insurance products is welcome. For those interested in reading more on the green paper, an article from my colleague Will Meredew explains more.

However, this ambition is fundamentally at odds with HMRC’s approach to the taxation of Group Income Protection policies. Tax changes that came into force in 2017 currently disincentivise the take up of such insurance through the workplace, which can provide health and rehabilitation services that help keep employees healthy and in work.

Group Income Protection is a safety net for both businesses and staff. If you have a family and a mortgage for example, it provides peace of mind that if you were to be off work for a long period due to ill health, you would receive an income.

On a personal note, when I had a younger family, the tax treatment of Group Income Protection encouraged me to maximise the cover possible while minimising the upfront cost. This was structured as a core policy paid by my employer with an additional flexible benefit that was subtracted from my monthly salary. Neither the employer-funded premiums nor the payment I sacrificed from my salary were taxed. If I had needed to make a claim – although, luckily, I never did – the payout would have been taxed as income under the usual PAYE rules. It was a deal that worked for myself, for DWP given it reduced the chance of me needing to claim benefits, and it worked for HMT as they would receive any tax due at the right time.

It is therefore frustrating that following reforms to the taxation of optional remuneration arrangements in 2017/2018, the tax treatment of employee funded cover (via a salary sacrifice arrangement) has become less favourable and much more complicated.

These reforms mean that employee funded premiums are now treated as taxable benefits. HMRC originally considered that the whole of the insurance claim should also be taxable: this is unequivocally double taxation and was obviously unfair. The ABI and members made a strong representation to HMRC demonstrating why their interpretation of their own change in the law was technically flawed. We argued the correct outcome was to treat both the employer and employee premium contributions as not taxable whilst still taxing the claim. Unfortunately, HMRC only agreed with half of the argument and came up with a half-baked position. This taxes part of the premium and part of the claim, with pseudo-science required to apportion the taxable and non-taxable components.

The significant unintended consequences of HMRC’s preferred position includes:

  • Adverse interaction with other benefits such as Universal Credit. Universal Credit is reduced by any non-taxable income on a £ for £ basis. This means the insurance paid for the employee loses all its value as the relevant part of the claim is not taxed;
  • Additional compliance such as tax returns required for vulnerable people / new claimants;
  • Uncertainty over how historic claimants should be taxed under the latest HMRC interpretation as a result of HMRC analysis changing over time; and
  • Complexity and confusion for employers and employees

Industry surveys report these developments are already discouraging take-up and this will inevitably push the burden back on the state. We are therefore advocating HMRC reverts to the previous position of only taxing at the point of claim in-line with our technical analysis. We consider this is fairer for employees, insurers, employers and the state.

The table below sets out a summary for those keeping score:


Employee top-up 




Not a taxable benefit 

Not a taxable benefit 

All taxed as income 

HMRC position on introduction of OPRA 

Taxable (p11d) benefit in kind 

Not a taxable benefit 

All taxed as income i.e. dual taxation of employee premiums and benefits 

2019 HMRC position 

Taxable (p11d) benefit in kind 

Not a taxable benefit 

Employer funded claim taxed as income, employee funded claim not taxed 

ABI proposed Solution 

Not a taxable benefit 

Not a taxable benefit 

All taxed as income  


We have been engaging with HMRC for the best part of two years to try and get the Revenue to revisit its position to no avail. Although very disappointing, I can at least understand the desire to stand behind (an admittedly flawed) technical analysis.

What I cannot accept is the lack of public information that HMRC has so far put out to explain the current tax treatment. It is only by reading between the lines across different HMRC manual pages[1],[2] that the complexity of the split taxation treatment of a claim can be found. The claims page does not even reference group income protection policies! It is likely that individuals have previously been over-taxed, and indeed some continue to be over-taxed. The adverse tax treatment under both versions of the HMRC position is also reportedly already putting off employers from offering a flex component - a classic case of the tax tail wagging the policy dog.

We understand that HMRC is intending to issue more specific guidance in this area – however in view of the delays to date, since both the introduction of OpRA and their change of approach, I am not holding my breath. That will not solve the problem of policy incentives diluting take up of a valuable safety net.

We are liaising with GRID, who are focussed on the group risk industry, on this topic. They are aligned with the ABI and we will both continue to push HMRC for change.

We continue to call for HMRC to revisit its position and, if they will not change their technical analysis, for a legislative solution, to restore the previous simple and effective taxation position: treating premiums as non-taxable and claims as taxable. Otherwise, I fear the Government’s broader desire to promote the benefits of protection insurance to businesses and self-employed alike might not have the impact it deserves.


[1] https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim44120 (example 2)

[2] https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim06430

Last updated 23/07/2021