How does business health insurance taxation work?

A group health insurance policy covers several people and gives them access to private healthcare services. Providing your team with private medical insurance has many business benefits. Employees get quicker access to treatment and need less time off due to illness.

Group health insurance premiums typically cost less per head than individual private medical insurance policies. The insurance company can spread its claims risk over multiple people. You can tailor your coverage to suit your needs, and most insurers offer policies for businesses of all sizes.

Private health insurance is a highly valued employee benefit and can offer tax advantages. However, it's vital you understand all the tax implications before you invest.

Here's our quick guide to the tax implications of private medical insurance for businesses. Always take professional advice from your accountant and financial advisers to understand your business's tax position.

Corporation tax

Private health insurance premiums are an allowable business expense for corporation tax purposes, meaning you can claim tax relief and reduce your corporation tax bill.

If you intend to buy a group policy to cover all your employees, it's worth considering whether to include company directors as well. Depending on your circumstances, it can be more tax-efficient for company directors to pay for their private medical insurance personally. Always speak to a tax professional for tailored advice.

Insurance Premium Tax

There are two rates of Insurance Premium Tax (IPT). IPT applies to all general insurance premiums in the UK. The higher 20% rate usually applies to travel insurance and some policies sold with domestic appliances or vehicles. The standard rate of 12% applies to other insurance policies.

Your insurance company should be registered for IPT and include the tax in your premium when they send you a quote, so you can see exactly what you'd be paying. However, you might see the IPT itemised in your quotation.

National Insurance contributions

HMRC treats health insurance premiums as a benefit in kind, which means they are subject to income tax and National Insurance. This means that the employer pays additional employer's National Insurance contributions on the value of the benefit, which is equivalent to the premium cost.

The way that National Insurance is calculated and paid varies depending on how the premiums are paid and by whom.

Employer pays the premiums to the insurer directly

If you arrange your business health insurance policy with the insurance company and pay the premium to them directly, you must report the value of the benefit to HMRC and pay Class 1A National Insurance contributions.

The employee arranges the insurance, and the employer pays the premium

You can allow your employees to choose their own health insurance policy and agree to pay the premium on their behalf. Taking this approach lets your employees select the private health insurance that best meets their needs without worrying about the cost.

If your employee arranges their policy and you then pay the insurance provider directly, you should add the value of the benefit to their other earnings. Then, you'll pay Class 1 National Insurance when you put their earnings through payroll.

The employee pays the premium and claims it back

Alternatively, you can let employees choose their private health insurance, pay the premium themselves, and claim it back. In this case, treat the cost as part of their earnings and process it through payroll.

When you provide your employees with business health insurance, it affects the amount of income tax they pay. While employers must pay National Insurance contributions on the value of their health insurance premiums, this doesn't apply to employees. However, they must pay income tax on the value of the benefit.

There are several ways to provide your staff with health insurance. You can buy a group health insurance policy and pay the premiums through your company, or invite employees to pay the premiums if they want to join the scheme. Alternatively, you can invite them to choose a policy and pay the premium.

Income tax

The income tax payable on health insurance premiums varies depending on whether the employer or the employee pays the premium. Usage of salary sacrifice schemes also influences the tax position.

When investing in health insurance, you must ensure your employees can access professional advice to help them understand how this affects their tax position. Providing information on sources of free, low-cost and paid advice is ideal.

When an employer pays the premiums

If your business pays for employees' private medical insurance, they must pay income tax on the value of the benefit. This applies whether you pay the premium directly to the insurance provider or the employee pays it and claims it as an expense. The way payments are processed and reported depends on how they're made: some are reported to HMRC, while others are processed via payroll with the rest of each employee's salary.

When an employee pays the premiums

If you've chosen a group private health insurance policy and created a voluntary scheme, staff can pay the premiums if they decide to join. In that case, they'll pay the cost from their net salary after income tax, so they won't have to pay tax on the value of the benefit.

If you set up a salary sacrifice scheme that deducts medical insurance premiums from pre-tax earnings, you must register the scheme with HMRC. HMRC will ask your employees to pay tax at the end of the tax year.

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As an employer, you have a legal duty of care to protect your employees' health, particularly in relation to activities that carry an increased risk of work-related illness or injury. You can therefore provide some types of healthcare and monitoring without paying additional tax. This can be complex, especially if you provide health screening, check-ups, and treatment through your company's health insurance. It's wise to seek professional advice to understand your tax position.

Here are the tax-exempt check-ups and treatments.

Medical checks and screening

Many group health insurance policies offer general health checks to help employees gain insights into their overall health, along with support for living a healthier lifestyle. These checks are typically available either as part of their health insurance or at a discounted rate through the insurer's rewards programme. There's a range of options depending on your chosen insurer and policy, ranging from basic tests to a full fitness profile.

Your employees can have one tax-free check-up per year.

Eye tests

The Display Screen Regulations require employers to provide eye tests for employees who use display screens as part of their work. Paying for eye tests using health insurance can be a cost-effective approach, but you can also fund tests without HMRC treating them as a benefit in kind.

Glasses and contact lenses

We've mentioned the need to give employees access to eye tests if they work with screens. If the test confirms that an employee needs glasses or contact lenses to work with screens, you must also fund these and can do so tax-free. Adding optical coverage to your health insurance policy can make this process more straightforward, as policies typically cover glasses and contact lenses if the prescription has changed since their last eye test. Your employees can use their health insurance to pay for their glasses even if they're needed for non-work-related reasons.

Treatment outside the UK

If your employees need medical treatment while working overseas, you can pay for it tax-free, either through their health insurance or by making a direct payment to their treatment provider. Most travel insurance also funds emergency treatment for shorter trips. If you provide international health insurance for routine medical care abroad, it's only tax-free if you arrange the health insurance or treatment in advance and pay the provider directly. Alternatively, you can agree to fund treatment in advance.

Insurance or treatment for work-related reasons

As we've mentioned, some health conditions relate directly to an employee's work. Examples include noise-induced hearing loss, musculoskeletal issues, and conditions caused by vibrating tools. Treatment for work-related conditions is tax-exempt, but only if you pay for treatment solely related to their work. For instance, if musculoskeletal problems are a significant risk in your industry and you invest in health insurance to provide treatment, the policy can only cover those conditions. Otherwise, it won't be tax-deductible. As you can appreciate, this can be complex, so you must seek professional guidance.

Treatment to help an employee return to work

Your occupational health team can help an employee return to work after a sickness absence by arranging suitable medical treatment to support their recovery. If an employee has already been absent for over 28 consecutive days, or if a health professional assesses them and confirms that they will be absent for at least 28 days, you can pay up to £500 in treatment costs tax-free.

You must report the private healthcare services and private health insurance provided to your employees to HMRC so they can calculate the appropriate tax and National Insurance that you and your employees need to pay.

As discussed, the tax payable varies depending on how you arrange and pay for employee health insurance. You can arrange the health insurance or private medical treatment with the provider and pay the premiums or costs directly to them. Alternatively, your employee can arrange treatment or insurance themselves, then ask you to pay the provider directly. In both cases, you must report the amount paid to HMRC using form P11D.

If your employees pay for treatment themselves and claim the costs back from you, or if you've given them a cash allowance or increased their salary to pay for health insurance or private medical care, you must treat the costs as earnings. You'll need to add the costs to their payslip and put it through payroll with their other earnings.

If you’re providing your employees with private medical insurance, it’s a good idea to seek advice from your accountant and financial advisers. At Globacare, our specialist brokers help you find the best healthcare coverage for your needs and budget. Contact us for a comparison quote.