Are PHI payouts taxable?

clairehi

Pretty much as the title says really. I am planning to take out PHI cover but most insurers only offer maximum cover of 50-66% of gross salary.

So if you made a successful claim on this insurance, which could go on for a long time, would you have to pay income or other tax on the payments? If not, then the value of the cover would be quite a bit closer to your "take-home" income.

TIA

ArchieB_2

That's why the limit is set as you say - as the max benefit would be near to your take home pay. Any more and there would be little motivation to go back to work and any less mat leave you unable to meet all you bills.

lisyloo

I would advice checking that your employer does not provide this (or your employers pension scheme) before purcahsing it.

My employer provides it for free.

zzzLazyDaisy

If the employer provides the PHI any payout is subject to tax and NI, as it is paid to you as a salary in the normal way (in effect the employer is taking out insurance to cover your sick pay)

If you take the cover out yourself, in your own name, then no tax or NI is payable as it is not classed as earnings from employment.

Do note that often the insurer does deduct certain other income you may have from other sources before paying out the benefit, such as state incapacity benefit, any sick pay from the employer, and any other insurance payouts you may have such as mortgage or credit card cover.

Also, if you do take it out, keep a careful eye on the cover and premiums. Insurers tend to increase the cover (and premiums) each year to keep pace with inflation. This is fine provided your earnings also keep pace. BUT if you do need to claim, most insurers will require evidence of your income immediately before the period of incapacity began, before paying out. If for some reason your salary hasn't kept pace or even dropped for some reason, you will normally still only get 64% of your actual salary before you went off sick, regardless of what it says on your annual statements.

So be careful not to over-insure and end up paying out too much in premiums.

clairehi

zzzLazyDaisy wrote:

If the employer provides the PHI any payout is subject to tax and NI, as it is paid to you as a salary in the normal way (in effect the employer is taking out insurance to cover your sick pay)

Thats interesting because my OH has this cover provided by his employer, as part of his benefits package. But still only 65% of his salary, before the taxman takes anything - seems not such a good deal now.

jasonking

It actually depends what type of cover the employer has put in place. Your OH may have group PHI which means cover is paid directly to the employee (as it is his policy bought under a group scheme) and willbe paid tax free etc. Get your OH to check with his HR dept is best

clairehi

Thanks Jason.

He also has quite generous life assurance as another benefit - 10 x salary. They havent provided any documentation on this either. I was wondering whether it would be possible to write this in trust. Do you think its worth asking?

jasonking

Its not unusual not to have any documentation about death in service benefits, but it should be referred to in his employment contract. As its Death in Service benefit it will be in trust automatically, but you should make sure that he has completed a Nomination form to tell the trustess who he would like the proceeds to go to

clairehi

Its not provided as part of the pension scheme (which is a stakeholder) so Im not sure it works like that but will check. I would like to ensure that if the worst was to happen it would be outside both his and my estate for IHT purposes. I know this can be arranged by a flexible power of appointment trust, if it was a policy I was arranging myself, but if the company have got one mega-policy for all employees I dont know if this is possible.

Update - although the life assurance is provided by a different company than the stakeholder, the pension trustees are in charge of it all the same. Ive found the nomination form and asked him to sent it in. Thanks for the prompt.

Second update. His PHI payouts would be made through payroll and would be taxable. better than nothing though!

lisyloo

but if the company have got one mega-policy for all employees I dont know if tis is possible

Usually it's not possible.
If it's your own policy you can appoint your own trustees.
If it's a group policy then trustees are in place.

You can send in a nomiation form to express your wishes.

One thing you should be aware of is that they are not legally obliged to follow you wishes although in 99.9% of cases they would.
The only cases where they might deviate would be if there were dependents (children or disabled adult) but you had expressed a wish for money to go to someone else.
Ordinarily the wouldn't deviate from your wishes.

zzzLazyDaisy

clairehi wrote:

Thats interesting because my OH has this cover provided by his employer, as part of his benefits package. But still only 65% of his salary, before the taxman takes anything - seems not such a good deal now.

BUT if the company is providing the benefit at no cost to your OH, then it is still worth having, especially if he has to go on long term sick and has exhausted his entitlement under the sick pay scheme