Employer Paid Medical Insurance Premiums

Employee Perquisites

Introduction

Section 21 Finance Act 2001 caters for the situation in which an employer pays the medical insurance premiums and long-term care insurance premiums of an employee as part of that employee's remuneration, that is, as a perquisite (or “perk”). As medical insurers would not be able to distinguish such payments from others made by employers on behalf of their employees - usually payments of premiums under group scheme arrangements - all premium payments by employers will be treated in the same way, that is, the reduced premiums under the relief at source scheme (TRS) will be payable in all cases.

This section ensures that both employees and employers are, in effect, treated in exactly the same way as under the pre-April 2001 system in relation to the taxation of the perquisite.

Tax treatment of perquisite -Employee

An employee is chargeable to income tax at his/her marginal rate on the value of the gross premium (as a taxable perquisite) but will be given a credit for tax relief, at the standard rate, in respect of that premium in the calculation of the tax chargeable on that perquisite. As was the case under the pre-April 2001 system, standard rate employees will pay no additional tax on the perquisite while higher rate employees will pay tax (at the difference between the higher and standard rates) on the gross value of the perquisite.

Tax treatment of perquisite -Employer

To maintain a neutral tax position vis-à-is the pre-April 2001 situation in the case of the employer, the value of the tax relief at source will be recovered. The employer deducts and retains income tax at the standard rate of income tax (20%) under the relief at source arrangements and a charge of income tax equal to the standard rate percentage of the gross premium is imposed on the employer.

The employer makes a payment equal to 20% of the gross premium to Revenue. This tax payment will be allowed as a deduction in taxing the employer's profits so that, when combined with the amount of premiums actually paid to the insurer, the employer will get a deduction for tax purposes equivalent to the gross premium as is the case under the pre-April 2001 system.

The tax position is:
Employee:
The employee is taxed on the gross premium, £1,000 [i.e. net premium, £800 plus tax relief at source, £200] and is given a medical insurance tax credit of £200 [i.e. gross premium, £1,000 x 20%].

Employer Company:
The company, which has an accounting date of 31 December, pays the net premium, £800 direct to the insurance company on 1 July 2001. The company gets a deduction for the gross premium, £1,000 in arriving at the taxable profits. A payment equal to the amount of the tax relief at source i.e. £200 must be made by the company with it's payment of preliminary tax on 30 June 2002. Details of the payments of perquisites and tax deducted must be included in the company's corporation tax return, Form CT1 for the accounting period to 31 December 2001 - due 30 September 2002.