Yes, is the good news here. You may need to claim on an income protection policy someday, hopefully not too soon. While paying the income protection premiums, you can also claim tax relief, this is the only form of insurance in Ireland that is tax deductible.
It’s a win-win situation. You are covered for when unable to work, and you get income tax relief. What’s not to like?
Let’s take a look at income protection and tax to answer any questions that come along.
What is income protection insurance?
A very good question to get the ball rolling. In a nutshell, income protection insurance gives you financial cover for when you are unable to work.
You pay monthly income protection premiums to cover any lost income due to unforeseen circumstances. When you cannot work, your income protection policy will kick in, after an agreed period.
The income payments will cover salary shortfalls until you get back to work.
Can I claim tax relief on income protection premiums?
Yes is the short answer. Any tax relief is at the marginal rate at which you pay income tax. You should inform the company accountant when you start paying income protection premiums. They can then make the necessary adjustment to your salary.
This means that higher earners can claim back up to 40% of their annual premiums.
You can also claim tax relief by accessing the MyAccount services at Revenue.ie.
How about the self employed?
The same is true for self employed people. Depending on how you handle your tax affairs, you can claim the tax relief on an income protection policy. Usually the relief is claimed when doing the annual tax return.
Income protection is very important for the self employed.
Income can vary from month to month, and if you get an injury or take ill, you will need a backup. Looking at your total income, to see why you need income protection cover, is a good idea.
The benefits, when you need them, will far outweigh the income protection cost.
Permanent health insurance and income protection
You may hear that health insurance will cover all your needs when you are unable to work. Yes it will, but only the bills for your medical condition.
The difference is crucial. Of course it is great to have medical bills paid, but how about your salary? How are you going to pay all the other bills?
You take out an income protection policy to cover your salary when unable to work. Like health insurance you get tax relief on premiums paid, which is very welcome.
Will a protection payment affect my tax status?
It is unlikely that you see any change in tax status from a protection payment. You will only claim when you need it and at the end of the year, all should be the same.
The pay outs will not push you into a higher tax bracket and are designed to meet your needs, like your salary.
Your tax treatment may change when you are out of work, but usually in your favour.
Is there tax relief on income protection payments?
No, there is not any tax relief on income from your income protection insurance. You will pay income tax at your normal rate on the payment. Any PRSI, Universal Social Charge or other tax payments due will also be deducted.
You should look at income protection as a substitute for your salary until you are able to get back to employment. Your tax treatment should be more or less the same as when at work.
Tax credits and other arrangements should stay the same.
How does income protection work?
With every income protection policy you will have what is known as a deferred period. You cannot claim a pay out until the deferred period has passed.
Most periods are of four, eight or ten weeks, though some high earners could have a 52 week one.
Before you process your income protection claim, you should be able to get Social Welfare illness benefit or similar. Many larger firms have a sick pay policy which should see injured people through the first weeks.
If your employer offers sick pay, you should take it first.
Does income protection cover redundancy?
No, redundancy is not covered by income protection policies. The simple idea is that income protection cover is for when you are unable to work, not when you are out of work.
You can check with the insurance company or insurance provider what exactly is covered by any insurance policy.
If you pay tax, you could be entitled to a benefit payment when made redundant.
Compare income protection plans
It is always a good idea to shop around. You do it when buying car insurance, choosing a broadband supplier or energy provider. Why not do so for income protection too?
Policies vary from company to company. If one company charges more than another, then take a look at the fine detail. There may be benefits in there that will come in handy when you cannot work.
A higher premium will mean more tax relief, so there is one benefit you can claim immediately.
Tax relief on income protection
Without wanting to label the point, you should look at all areas of tax relief. At your marginal rate, you could be making monthly savings that go straight into your pocket.
The benefits of protecting your income are many, and you never know when you will need to claim. You will feel the relief of not having to worry about your income and will be happy to have made the monthly payments. Paying less tax is nice too.
Tax relief and income protection at the same time.
What’s not to like about those two?
At Insure Your Income we know about income protection. The benefits to you and your family of having an income when you cannot work are enormous.
The fact that you can also claim tax relief is another big bonus. A little bit extra in the pay packet is always welcome, especially in the current economic climate.
Your income protection premiums are tax deductible. Contact us today to answer all your income protection questions.