While contracting offers lots of freedom and flexibility, there’s a trade-off. You don’t get paid if you don’t work.
Unfortunately, delays are common in the NHS. So, having private health insurance can give you the peace of mind that you can get treated swiftly and get back at it sooner should you fall ill or suffer an injury that leaves you unable to do your job.
Here’s a look at the ins and outs of private health insurance for contractors: what it is, why you should consider buying it, pitfalls to avoid, and the most tax-efficient way to pay for it.
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What’s private health insurance and how does it work?
As the name suggests, private health insurance covers your costs if you get treated privately instead of going through the NHS. You pay a monthly or annual premium. Then, if you get sick or injured, you make a claim and the policy will pay out for what’s covered.
The main benefit of going private is that you can get treated more quickly.
As a limited company contractor, you’re technically your limited company’s employee. And that means you can claim statutory sick pay. The catch is that statutory sick pay is paid by the employer, not the government.
Leaving aside that it makes little sense to stop your usual salary and dividends for £96.35 a week, you’re effectively paying yourself your own money. Meanwhile, there’s no revenue coming in.
Typically, you can arrange a private GP consultation online in under 24 hours and book tests in a matter of days. In comparison, NHS waiting times can span several months.
But going private also has other benefits:
- You can choose the date and time of your appointment instead of being allocated one that might not be convenient for you
- You can choose where and by whom to get treated
- You’ll get access to more comfortable facilities
- You can get treatments that aren’t available on the NHS because they’re experimental or too expensive
What’s covered by private health insurance?
This depends on two factors:
- How much you’re prepared to pay
- How the policy is underwritten
You get what you pay for… but only up to a point
At the risk of stating the obvious, what your policy will cover largely depends on how much you’re willing to pay.
There are three main types of private health insurance cover:
- In-patient cover pays for the cost of a hospital stay
- Outpatient cover pays for appointments, diagnostic tests, and other treatments and procedures that don’t require you to stay in hospital overnight
- Day patient cover pays for tests and regular appointments — your annual check up, for instance
A cheap policy may only cover in-patient treatment. And payout limits may apply. Which means that, if your costs go over a certain amount, you’ll have to pay for the difference out of your own pocket.
More expensive policies, on the other hand, have no payout limits. And they can cover everything from in-patient care to your yearly checkup, dentist’s visits, and even specialist or experimental treatments.
That said, private health insurance cover is limited to acute conditions — conditions that appear suddenly and worsen quickly. Arthritis, diabetes, and other conditions that have to be managed for the rest of your life are usually excluded.
Most private health insurance policies also exclude the following:
- Treatment for drug addiction and alcoholism
- Fertility treatment
- Pregnancy and childbirth
- Other treatments that are considered non-essential
Full medical underwriting vs moratorium underwriting
Alongside how much you’re prepared to pay, how the policy is underwritten will also affect what’s covered.
Moratorium underwriting covers any condition — other than those specifically excluded by the policy or the type of cover you’ve chosen — provided you haven’t sought treatment for them for a certain number of years.
By contrast, if your policy uses full medical underwriting, the insurer will go through your medical history. And anything you’ve been treated for before buying the policy will be considered a pre-existing condition and, so, not covered.
Both have their pros and cons.
With moratorium underwriting, the signup process is quick and easy.
Even better, a condition is only pre-existing — and, so, excluded — if you’ve sought treatment during the moratorium period.
Imagine you broke your arm when you were 10 years old. You’re now 35 and you’ve bought a private health insurance policy with a moratorium of 2 years.
You broke your arm 25 years ago. So, if you break your arm again now, it’ll be covered. By contrast, if you went with a full medical underwriting policy, your broken arm would be pre-existing. So if you broke it again, the cost of treatment wouldn’t be covered.
The other side of the coin is that you won’t be sure you’re covered until you try to claim. And your claim will take longer to process, because the insurer will have to check whether the moratorium applies.
In comparison, there’s no doubt about what is or isn’t covered with full medical underwriting. So your claims will be processed more quickly.
The downsides are that the signup process is much longer. And, anything you’ve been treated for before you bought the policy can never be covered, even if you got sick or were injured decades ago.
Buying private health insurance: 6 tips to keep it affordable without compromising on quality
Needless to say, when it comes to buying private health insurance, cost is a key factor. The more you pay, the more cover you’ll get. By the same token, the less you’re prepared to pay, the more you’ll have to compromise.
That said, there are ways to keep things affordable and still get decent cover.
Here are six tips to help you go about this:
1. Think logically about what cover you need
It’s worth noting that private health insurance isn’t meant to be a replacement for the NHS. In fact, in some cases — emergencies are a case in point — the NHS is far better equipped to treat you than any private clinic.
With this in mind, an effective way to keep costs down without compromising on quality is to limit your cover to treatment — elective surgery, for instance — that either isn’t available or takes long to access on the NHS.
Many private health insurance plans are ‘modular’, so you can add or remove benefits as you see fit.
2. Increase your excess payment
The excess is the amount you have to pay out of your own pocket. A higher excess means your insurer has to pay less, so it’ll lower your premium. Similarly, a lower excess means your insurer pays more in the event of a claim. So your premium will be higher.
In private health insurance, the excess is typically due once a year, not every time you claim. As a result, your age and general state of health will affect whether a high excess is good value.
Let’s say your policy has an excess of £1,000.
If you’re young and healthy, chances are you won’t claim more than once a year — if at all. This means your excess makes it unlikely you’ll get good value, because you’ll have to make a fairly big claim for the policy to kick in.
In comparison, if your health isn’t that good, you’re more likely to make several claims in one year. So you’ll still get value out of your policy, despite the high excess.
That said, don’t go overboard. Regardless of your age and general state of health, there’s a point at which the excess is so high it defeats the purpose of paying for private health insurance.
3. Reduce your hospital choices
Most private health insurance plans have a list of hospitals and clinics where you can get treated.
Unless you travel continually, you’ll probably seek treatment at a clinic or hospital close to home. So, cutting out hospitals and clinics that are further away from where you live is a painless way to slash your premium.
Similarly, most ‘premium’ hospitals are in London. If you don’t live in or close to London and are unlikely to travel there for treatment, you’re paying extra unnecessarily.
4. Pick a ‘guided’ policy
A ‘guided’ or ‘directional’ policy is a policy with a restricted list of consultants or one in which the insurer decides who will treat you.
Again, limiting your choices when it comes to which doctor will treat you can slash your premium.
5. Pick a policy with a 6-week wait option
Here, you agree to get treated on the NHS if the waiting time is less than 6 weeks. Your policy kicks in and you can get treated immediately if the waiting time is longer.
This waiting period only applies to in-patient treatment. So if you also have outpatient cover, you can still get this treatment straight away.
6. Shop around… but avoid switching
While it pays to shop around when you’re picking a new private health insurance policy, it’s usually best to stay loyal once you’ve made your choice, for two reasons.
Firstly, a new insurer won’t cover treatment for conditions you’ve claimed for under an old policy because they’ll be considered pre-existing. At best, you’ll have to wait for a moratorium period to pass.
Secondly, the older you are, the more of a risk you’re considered to be. And this makes it less likely that you’ll get a better deal than the one you already have.
For this reason, it’s best to choose wisely. Read your policy carefully and make sure you understand what is and isn’t covered.
More importantly, ask other contractors about their experiences. Ultimately, insurance is all about the claims process.
Has this been smooth for your colleagues? Or has a particular insurer given them a bad experience?
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What’s the best way to pay for private health insurance as a contractor?
Alongside tweaking your policy benefits, how you pay for private health insurance can also affect the cost.
As a contractor, you can pay the premium out of your own personal funds or the company can pay for it. Depending on your circumstances, one method can result in tax savings that bring your costs down.
Paying for private health insurance through your company
For your company, private health insurance is an allowable expense. You can deduct it from your income and pay less corporation tax.
The catch is that, because it benefits you personally, HMRC treats it as a benefit in kind. So you’ll have to pay income tax and national insurance on it. And your company will have to pay employers’ national insurance.
If you take a substantial salary, the benefit in kind could tip you into a higher income tax rate. There’s also additional paperwork involved — you’ll need to file a P11D form at the end of each tax year.
Paying for private health insurance personally
There’s no benefit in kind if you pay for your private health insurance from your personal funds. The downside is that you have to pay it from your taxable income. If you take a larger salary or dividend to make up for the premium, you’ll still pay more tax.
With this in mind, there’s no straightforward answer to whether it’s more tax-efficient to pay personally or through your company.
If you tend to withdraw just enough money to live on, it may make sense to pay benefit-in-kind tax. Conversely, if you withdraw most of your profits, benefit-in-kind tax could push you into a higher income tax rate. So it’s probably better to pay personally.
That said, this is only a rough guideline. It’s best to speak to your accountant as they can advise you based on your specific situation.
Read more in our dedicated guide: who should pay for my health insurance expenses?
Which Medical Insurance Provider should I choose?
Like many other types of service (such as utilities), many of us find it hard to objectively compare providers.
The medical terms used are often unfamiliar, policies are often fairly restrictive, and it is very difficult to accurately compare the real cost of policies, as there are so many different options and variables.
As a result, we highly recommend using a contractor specialist firm to help you find the right provider.
Get a quote / find out more
To get a personalised quote or to ask any questions, please fill in this form, and the friendly team at our dedicated contractor IFA, Broadbench, will get right back to you.