Tax on PHI Payments

Jo_King
Jo_King Posts: 210 Forumite
First Post First Anniversary Combo Breaker
edited 19 July 2019 at 5:38PM in Cutting tax
Hello,

I'm hoping someone will have the knowledge to get me out of my befuddlement on this.

My employer provides free PHI, on the condition of signing up to the work pension. It might be worth adding that my employer is a registered charity, so isn't liable for corporation tax (as I understand it).

After an injury I had to reduce my hours. I now get my salary for the days I work, and a PHI payment for the days I'm no longer able to work. This is all processed by work's Pay Roll department.

The question is, should the PHI element be taxed? I've found conflicting information online.

Thanks for your help!
«1

Comments

  • dave030445
    dave030445 Posts: 1,001 Forumite
    First Anniversary First Post Combo Breaker
    Jo_King wrote: »
    Hello,

    I'm hoping someone will have the knowledge to get me out of my befuddlement on this.

    My employer provides free PHI, on the condition of signing up to the work pension. It might be worth adding that my employer is a registered charity, so isn't liable for corporation tax (as I understand it).

    After an injury I had to reduce my hours. I now get my salary for the days I work, and a PHI payment for the days I'm no longer able to work. This is all processed by work's Pay Roll department.

    The question is, should the PHI element be taxed? I've found conflicting information online

    Thanks for your help!
    Mines taxed. But you are right there is loads of conflicting info online.
    Even CAB online have it wrong as they say all PHI's are tax free.
  • 00ec25
    00ec25 Posts: 9,123 Forumite
    Combo Breaker First Post
    edited 5 August 2019 at 12:51AM
    Jo_King wrote: »

    My employer provides free PHI,

    The question is, should the PHI element be taxed?
    what you need to understand is there is a straightforward test that governs whether some, none or all of the payout is tax free. It is: who paid the premium?

    - where the employer paid it, and you contributed nothing towards it at all, then the payout is taxable in full (no exemption) because you have not paid any tax on the "reward" you are getting via your employer

    - where you paid in full (vital assumption: you paid it from post tax net pay, not pre-tax gross pay), then the entire payout is tax free ("the exemption") as the theory is you have already paid tax on the cost of the premium, so the payout is tax free.

    - where there is a mix, the bit you paid is tax free ("the exemption"), the bit the employer paid is taxable (no exemption)

    You state the policy was "free" so on that basis it appears the premiums were paid entirely by your employer with zero contribution from yourself. Therefore, any money you receive now is taxable in full.

    I hope you'll agree that the only place worth looking for tax rules is HMRC itself? There are many pages on the Insurance Policyholder Taxation Manual dealing with PHI, this however appears to be the best single page summary. "One person" in this context is the employer. "Other person" in this context is the employee: you.

    https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm6120

    "where a policy is taken out by one person wholly or partly for the benefit of another, and that other person contributed to the premiums, as defined below 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."



    There are many other pages covering in detail the various issues, this is the start point if you want to get a background understanding

    https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm6100
  • dave030445
    dave030445 Posts: 1,001 Forumite
    First Anniversary First Post Combo Breaker
    Even HMRC themselves were unsure if it was taxed or not some said yes and some said no. Took nearly 3 years of back and forth to get the answer. I just hope i have the right answer now.
  • Jo_King
    Jo_King Posts: 210 Forumite
    First Post First Anniversary Combo Breaker
    Thanks for your help. 00EC25, thanks for the HMRC information. I'll send it on to my new financial advisor.

    Work got themselves confused because there's the question of them having filed the premiums as tax deductible when they bought them - except they didn't, because they don't pay tax. Therefore, my contact is thinking, if the premiums weren't tax deductible pre claim, should the payouts be tax deductible post claim.

    Anyhow, I've decided to let work and HMRC resolve this. It's way above my pay grade!
  • Jo_King wrote: »
    Hello,

    I'm hoping someone will have the knowledge to get me out of my befuddlement on this.

    My employer provides free PHI, on the condition of signing up to the work pension. It might be worth adding that my employer is a registered charity, so isn't liable for corporation tax (as I understand it).

    After an injury I had to reduce my hours. I now get my salary for the days I work, and a PHI payment for the days I'm no longer able to work. This is all processed by work's Pay Roll department.

    The question is, should the PHI element be taxed? I've found conflicting information online

    Thanks for your help!
    Mines taxed. But you are right there is loads of conflicting info online.
    Even CAB online have it wrong as they say all PHI's are tax free.
    Did you get any joy after about tax on this payment? I have monthly phi and mine is taxed 
  • Jeremy535897
    Jeremy535897 Posts: 10,427 Forumite
    First Anniversary First Post Name Dropper
    "I hope you'll agree that the only place worth looking for tax rules is HMRC itself?" It's certainly a good starting point, but there are 100 plus years of case law that show HMRC is by no means always correct.
  • "I hope you'll agree that the only place worth looking for tax rules is HMRC itself?" It's certainly a good starting point, but there are 100 plus years of case law that show HMRC is by no means always correct.
    Yes I cant seem to find it ..seems to be difficult to find a straight answer x
  • Jeremy535897
    Jeremy535897 Posts: 10,427 Forumite
    First Anniversary First Post Name Dropper
    "I hope you'll agree that the only place worth looking for tax rules is HMRC itself?" It's certainly a good starting point, but there are 100 plus years of case law that show HMRC is by no means always correct.
    Yes I cant seem to find it ..seems to be difficult to find a straight answer x
    I don't disagree with 00ec25's view, except for the one statement I referred to in my post. It's all about who paid the premia.

  • Even HMRC themselves were unsure if it was taxed or not some said yes and some said no. Took nearly 3 years of back and forth to get the answer. I just hope i have the right answer now.
    What did you do during the 3 years back n forth ? Did you pay the tax on your payments each month ? Mine is getting taxes each month over £100
  • "I hope you'll agree that the only place worth looking for tax rules is HMRC itself?" It's certainly a good starting point, but there are 100 plus years of case law that show HMRC is by no means always correct.
    Yes I cant seem to find it ..seems to be difficult to find a straight answer x
    I don't disagree with 00ec25's view, except for the one statement I referred to in my post. It's all about who paid the premia.
    Employer paid it ...when hubbie was employed he was paid through his work as a reduced wage paid by phi ..when he finished due to long term ill health ..they paid direct to him from insurance company..he has a gross amount each month and they deduct tax before received like a wage is 
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