The benefits are tax-free where income protection insurance is taken out on an individual basis. IPI can be arranged by an employer on a group basis, and in this case the income is taxable.

The employer will pay the premium which is a tax-deductible business expense. From the employee’s point of view, the premium paid by the employer is not taxable as a benefit so they do not have to pay tax or NI on the premium, provided that the employer has discretion as to whether to pay the proceeds to the employee.

In practice, the employer does have such discretion and pays the proceeds to the member involved. The scheme member then pays tax and National Insurance on the proceeds.