Medical Insurance

Overview 📘

Private medical insurance is one of the most popular employee benefits, particularly amongst growing technology companies looking to attract and retain talent.

Many insurers offer discounted rates for company schemes, making it a cost-effective benefit for employers. However, because the employer is providing a personal benefit to employees, there are tax and reporting obligations that need to be considered.

💷 How is medical insurance taxed?

Where an employer pays for private medical insurance, the cost is normally a taxable benefit for the employee. The taxable value is usually the annual insurance premium paid on their behalf.

The employee pays Income Tax on the benefit at their usual tax rate.

Example

If your annual medical insurance premium is £800:

• A basic rate taxpayer (20%) pays £160 of Income Tax.
• A higher rate taxpayer (40%) pays £320 of Income Tax.

The tax can either be collected during the year through payroll or via the employee's tax code after the end of the tax year.

👨‍👩‍👧 Can family members be included?

Yes. Most insurers allow partners and children to be added to the policy.

If the company pays for family cover, the additional premium is generally treated as part of the employee's taxable benefit.

Some employers ask employees to reimburse the extra cost through payroll. Where the employee fully repays the additional premium, this can reduce or eliminate the additional taxable benefit.

📋 How is the benefit reported?

Employers must report the benefit to HMRC in one of two ways:

• Payroll the benefit, so Income Tax is collected throughout the year.
  • Note that this will become mandatory from April 2027, see here.
• Report it on a P11D after the tax year, with HMRC collecting the tax by adjusting the employee's tax code.

Whichever method is used, the employer is also responsible for paying Class 1A National Insurance contributions on the taxable benefit.

🦷 What about dental insurance?

Dental insurance is often offered alongside private medical insurance.

The tax treatment is generally the same. If the employer pays the premium, it is normally treated as a taxable benefit and is subject to the same reporting requirements.

💡 Can medical insurance be provided through salary sacrifice?

Some employers offer private medical insurance through a salary sacrifice arrangement, where employees agree to reduce their gross salary in exchange for the company providing the insurance.

However, due to the Optional Remuneration Arrangement (OpRA) rules, salary sacrifice does not usually remove the taxable benefit. Instead, the employee is generally taxed on the higher of:

• the salary they gave up under the salary sacrifice arrangement, or
• the taxable value of the medical insurance benefit.

As a result, salary sacrifice will not usually reduce the employee's Income Tax liability on private medical insurance, although it may still reduce National Insurance contributions in some cases.

If you're considering offering medical insurance via salary sacrifice, it's worth taking advice before implementing the scheme.

✅ Things to remember

• Private medical insurance paid by the company is normally a taxable benefit.
• Family cover is usually taxable unless the employee reimburses the additional cost.
• Employers must either payroll the benefit or report it on a P11D.
• Employers also pay Class 1A National Insurance on the benefit.
  • Note that this tax is not covered by the Employment Allowance.
• Dental insurance is generally taxed in the same way as medical insurance.

🔗 Useful Links

https://www.gov.uk/expenses-and-benefits-medical-treatment

If you're thinking of introducing private medical insurance, or you're unsure how it should be reported, Barnes & Scott can help. We can advise on the tax treatment, help implement the scheme, and ensure all HMRC reporting is completed correctly and on time.