Private medical insurance (PMI) is a popular employee benefit in the UK, offering access to faster medical treatment and a range of healthcare services. However, it’s crucial to understand the tax implications for both employers and employees.
TAX IMPLICATIONS FOR EMPLOYER
When a company provides private medical insurance to its employees, the cost of this benefit is considered a business expense. Here are the primary tax effects for employers:
Corporation Tax Relief
The premiums paid by the company for PMI are generally deductible as a business expense, reducing the corporation tax liability. HMRC allows companies to claim these premiums as a business expense under normal business expenditure rules.
National Insurance Contributions (NICs)
Employers are required to pay Class 1A NICs on the value of the benefit provided. This is calculated at 13.8% of the cost of the insurance premiums.
TAX IMPLICATIONS FOR EMPLOYEES
Benefit-in-Kind (BIK)
The provision of private medical insurance is classified as a Benefit-in-Kind. The value of the insurance premiums paid by the employer is added to the employee’s taxable income. This means the employee will pay income tax on the value of the premiums at their marginal tax rate.
Income Tax
The amount of income tax an employee pays on their PMI benefit depends on their tax band:
- Basic Rate (20%)
- Higher Rate (40%)
- Additional Rate (45%)
For example, if an employer pays £1,000 annually for an employee’s PMI and the employee is in the higher rate tax band, the additional income tax would be £400.
National Insurance
Employees do not pay National Insurance on the value of the PMI benefit; this is solely the employer’s responsibility.
PRACTICAL EXAMPLE
To illustrate, let’s consider an example where a company provides PMI costing £1,000 per year for an employee:
Employer – Claims £1,000 as a business expense, reducing corporation tax liability, and pays £138 (13.8%) in Class 1A NICs.
Employee – Has £1,000 added to their taxable income. If they are in the higher tax band, they would pay £400 in income tax on this benefit.
USEFUL HMRC REFERENCES
- Taxable benefits and expenses – A to Z
- Class 1A National Insurance contributions on benefits in kind
- Corporation Tax relief
Understanding these tax implications ensures that both employers and employees can make informed decisions about private medical insurance. If you have specific questions, get in touch with us and we will help you navigate your accounting and tax questions.
This post is correct as at 17 September 2024