Can medical insurance be a business expense?

Sep 27, 2022 | Business tax

Medical insurance is growing increasingly popular among businesses wanting to stand out from the crowd.

Employees accessing private medical care generally experience shorter wait times and can often access care outside work hours.

This can, in turn, increase employee well-being and boost productivity, making it an attractive option for employers.

Even better, you can claim medical insurance as a business expense. This means that your business may be eligible for tax relief on the value of the insurance.

However, it’s important to note that this can have other tax implications for both yourself and your employees.

Tax implications of business medical insurance

Insurance Premium Tax

You will need to pay insurance premium tax (IPT) if you purchase medical insurance on behalf of your employees.

Healthcare cover is subject to the standard rate of IPT, which currently stands at 12%.

Employee tax

Any employees covered under your company’s medical insurance plan will be taxed on the value of their insurance.

This is because medical insurance is classed under “benefits in kind” – benefits that your employees receive in addition to their wages.

Employees will need to pay both National Insurance contributions (NICs) and income tax on the benefit amount.

While it’s important for both employers and employees to understand the tax implications of medical insurance, it’s your responsibility as an employer to calculate the tax your employees must pay.

Reporting to HMRC

When you take out medical insurance for your employees, you have certain tax, NI and reporting obligations to HMRC.

What obligations you have depends on whether or not you arrange and pay the provider directly.

If you arrange and pay the insurance provider directly:

Firstly, you must inform HMRC by reporting the medical insurance expenses on your annual P11D form.

You must also pay class 1A NICs on the value of the benefit through the P11D(b) form.

In this instance, the value of the benefit is the cost to you of providing medical insurance.

If your employee arranges the insurance, but you pay the provider:

You will need to report the medical insurance expenses to HMRC on your P11D form.

You must also add the value of the benefit (the cost of the insurance to you) to the employee’s earnings when processing class 1 NICs through payroll.

However, you will not need to add the value to PAYE tax.

If you reimburse your employee’s costs:

If your employee arranges and pays for medical insurance and you reimburse them, that reimbursement counts towards their earnings.

In this instance, you must add the total of the payments to your employee’s other earnings. After that, you must deduct and pay PAYE tax and Class 1 NICs through payroll.

Further information on how to report taxable benefits is available through the HMRC website.

Tax relief

Because private medical insurance is classed as a business expense, businesses can receive tax relief. How you receive this tax relief depends on what kind of business you run.

Limited companies are eligible for tax relief on the cost of their medical insurance policy, so long as the policy is paid for through the business bank account.

However, directors should be wary of taking out medical insurance for themselves under the same policy. Directors are subject to the same tax on medical insurance as other employees, so it may be more cost-effective to take out a separate personal healthcare plan.

Unincorporated businesses are also eligible for tax relief. For these businesses, the overall cost of employee medical insurance can be deductible from the business’s taxable profits.

In this instance, however, owners or directors would not be able to claim tax relief on their own policy, as it would be classed as a personal expenditure instead of a business expense.

How can we help?

As beneficial as medical insurance may be for yourself and your employees, calculating and reporting the taxes on it can be complicated and time-consuming.

We think meeting your tax obligations should be easy- and with FMA, it can be.

With practical advice from our team of experts and our streamlined cloud-based payroll service, you can reap the benefits of business medical insurance without all the hassle.

Get in touch to find out more.

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