Private Medical Insurance covers the cost of obtaining private medical care should you fall ill. Insurance policies can be paid personally or met by your company as part of your remuneration package.
If, however, the company pays the premium, and the cost is met from a director’s loan account amount due to you, it is the same as having paid personally. But, if it creates an overdrawn loan account then the company will have a 32.5% liability to pay on top of the premium (recoverable if you repay the cost).
Here, Duncan Strike, Senior Director of Intouch Accounting explains how to calculate the real cost of paying for health insurance a) from your personal funds, or b) via your limited company.
a) Paying Personally
If you pay the premiums personally there is no benefit in kind, but you will be meeting the cost from income that has already been taxed, whether or not at basic or higher rates of tax, or as salary or dividends.
For example, if you have to pay a premium of £1,000 personally, out of your net dividend income which would have originally been taxed at the basic rate of 7.5%, you would need to receive dividends of £1,081. If your dividend income is taxed at the higher rates the amount needed to cover the premium would be £1,481, so considerably higher.
As dividends are paid from your net business profits after corporation tax, then if you were a higher rate taxpayer you would need to have earned £1,828 extra in the company.
b) Paying via your Limited Company
If your limited company pays the premium on your behalf and is treated as a business cost then a taxable Benefit in Kind arises on which you will pay personal tax. The level of personal tax depends on your marginal rate of tax and, if this takes your taxable income above £100,000, whether or not you lose your personal allowances.
The company itself will gain Corporation Tax Relief, but will have to pay Employers NI contributions.
Using the same example above, if the company pays the same gross premium of £1,000 then it will have a Class 1A National Insurance liability of £138.
This total of £1,138 does give corporation tax relief though of £216, a net cost of £922.
As a higher rate taxpayer you would be taxed 40% on the gross premium, and will receive a tax demand for £400. But it doesn’t end there, in order to meet this additional personal tax bill you would need to draw further dividends, which in turn are taxed and paid from after tax profits. In effect costing £730 from your gross contracting company income.
The total cost to the company is therefore £1,652 if you are taxed at the higher rate which is less than if you were to pay it personally.
But, of course, it is marginal and the existence of a Benefit In Kind (BIK) adds to the complexity of both the company and your own tax affairs.
All calculations are of course based on your individual circumstances so I would advise speaking to your accountant to decide the best approach.
You can find out more about tailored private health insurance from WPA for contractors.