Executive Income Protection
However, the main difference between the two is that Executive Income Protection is taken out and paid for by the business on behalf of the Director or employee. The benefit, following any claim, is then paid directly to the business who continues to pay the employee or Director through PAYE whilst they are unable to work.
This type of policy benefits both the employer, who can then afford to hire an interim replacement during any period of absence, as well as the employee, who continues to receive a regular income whilst they are off work. Best of all, the premiums are usually treated as an allowance business expense.
An Executive Income Protection policy can form part of an appealing employee benefits package designed to attract and retains high-quality employees but is also very popular with Contractors, Sole-Traders, Tradespeople and Directors of their own small limited company given the associated tax benefits and the need to protect their earnings in the event of injury or illness.
In terms of taxation, an Executive Income Protection policy is treated in a similar way to a Relevant Life policy. The payments are usually treated as an allowable business expense. The proceeds paid to the business are taxed as a trading receipt and the benefits paid to the employee via PAYE are normally classed as an allowance business expense. This makes Executive Income Protection a more tax-efficient way of arranging replacement income cover.
Executive Income Protection provides protection both pre and post-retirement. This is because the replacement income benefit is paid via PAYE, ensuring that the employee’s pension contributions continue to be paid.
Much like a personal policy, Executive Income Protection can be arranged to provide benefit up to the age of 70.
Frequently asked questions
What is Executive Income Protection insurance?
Executive Income Protection insurance is very similar to traditional Income Protection policies, offering a replacement income for any policy holder (an employee or company director) who is unable to work due to an accident or illness.
The insurance policy is taken out and paid for by the business on behalf of the director or employee, and the benefit is paid directly to the business, who then continues to pay said employee or director via PAYE during their period of leave. The cover is paid for as an expense through the business.
How does Executive Income Protection work?
An Executive Income Protection policy works by giving an employee or director a continued wage in the event of an accident or illness. Taken out on behalf of the company, the business will make a claim, as long as a successful Executive Income Protection application has been made prior to the situation, and the cover will be paid for as an expense through the business.
Who is eligible for Executive Income Protection?
Executive Income Protection is a suitable means of protection for any employee of a UK business. Self-employed Limited Company directors are also entitled to benefit from Executive Income Protection with an eligible policy. It is a great option for a limited company director, employees of UK limited companies, partnerships, limited liability partnerships and sole traders.
Who is not eligible for Executive Income Protection?
Executive Income Protection is not designed for business owners of partnerships, limited liability partnerships or sole traders (in their capacity as owner) and those residing outside of the UK.
How is it beneficial to have an Executive Income Protection policy?
An Executive Income Protection policy is beneficial to both the employee and employer.
Employees who are policyholders are able to continue being paid as normal during their period of leave from work, whether that be for an accident or illness, and as this income is covered by the insurance provider, this means that employers can also hire an interim replacement staff member to cover the permanent employers workload.
Employers also benefit in that the premium is usually treated as an allowable business expense, and taxed as a trading receipt, meaning the cover is a more tax-efficient way of arranging replacement income cover.
Employers utilising the insurance policy can also use it as a way of attracting and retaining their staff and for attracting potential employees, forming an appealing employee benefits package.
Is Executive Income Protection tax-efficient?
As Executive Income Protection cover is treated as an allowable business expense, any tax is deductible and, as premiums are paid by the business, not from the employee or directors net income (as income tax and National Insurance contributions are taken first), the cover is tax-efficient, and usually much cheaper than arranging cover privately.