Understanding the Tax Implications of Company-Paid Private Medical Insurance (PMI) in the UK

Private Medical Insurance (PMI) is an important employee benefit that can enhance the wellbeing of your workforce. However, when managing a company-paid PMI policy through an insurer, the tax implications are often overlooked. If you're a Group Administrator (GA) for a small or medium-sized (SME) company, it’s essential to understand the taxes that apply to both your business and your employees when renewing or setting up a policy.

This article aims to explain the key tax implications of company-paid PMI in a clear and simple way, so you can make informed decisions and confidently answer any questions from your team or leadership.

This article is intended for SME businesses and consumers who take out policies through major insurers. It does not cover all available tax options—for instance, it does not include Trust schemes, which are typically suited to larger organisations, or WPA’s 30+ Group Deductible PCH scheme, which follows a different tax-efficient premium structure.

What’s Covered in This Article?

• The tax implications for the company, including VAT, Insurance Premium Tax (IPT), National Insurance Contributions (NICs), and corporation tax.

  
  

• The tax implications for employees, including income tax on benefits-in-kind.

  
  

• The tax implications of personal PMI policies, including Insurance Premium Tax (IPT) and other relevant considerations.

1. The Tax Implications for the Company

Let’s look at the taxes your business will need to consider when it funds PMI through an insurer for employees on a company-paid scheme. Here’s a breakdown of the main taxes involved:

1.1 Value Added Tax (VAT): Good news—there’s no VAT on PMI premiums paid by the company. This means you won’t be paying the usual 20% VAT rate on your premiums.

1.2 Insurance Premium Tax (IPT): While VAT is not applicable on PMI premiums, Insurance Premium Tax (IPT) does apply. As of 2024, the standard rate for IPT is 12%. This tax is automatically applied to your premium, and you will see it reflected in your renewal documentation, effectively adding to your total premium cost.

1.3 Class 1A National Insurance Contributions (NICs): Employers are required to pay Class 1A NICs on PMI benefits. The current rate for 2024/25 is 13.8%. This amount is handled by your accountant and is based on the premiums you pay for employees' coverage.

1.4 Corporation Tax: You can offset the cost of providing PMI to employees as a business expense, which can reduce your corporation tax liability. In 2024, businesses making profits of £250,000 or more pay the full corporation tax rate of 25%. If profits are under £250,000, the rate may be lower.

Here's an example to bring all this together.

Example:

A company sets up a PMI scheme through an insurer with an annual premium of £100,000. The company’s profits are £1,000,000, so the corporation tax (CT) bill is £250,000 (25%).

So what are the tax implications for the company?

• No VAT on the premium.

  
  

• IPT of 12% = £12,000 (added to the premium). So, the company pays £112,000 in total for the premium including IPT.

  
  

• The company pays Class 1A NICs at 13.8% on the £100,000 premium, which equals £13,800.

  
  

• After paying the premium, the company’s profits drop to £900,000 (£1,000,000 - £100,000), and their corporation tax bill is now £225,000 (£900,000 x 0.25), saving them £25,000 (£250,000 - £225,000).

  
  

Total Cost to the Company:

• Before tax implications: £100,000 premium

  
  

• After tax implications: £100,000 premium + £12,000 IPT + £13,800 NICs - £25,000 corporation tax saving = £100,800.

  
  

This example illustrates how PMI costs typically break down, including all taxes and the savings through corporation tax. Please note, this example is solely for illustrative purposes. For specific information related to your policy, it is recommended that you consult a regulated broker or contact your insurer directly.

2. The Tax Implications for Employees

When a company pays for PMI premiums on behalf of employees, the employees are subject to income tax on the benefit, known as a benefit-in-kind. The value of this benefit must be reported to HMRC via Form P11D.

How does this work? In simple terms, the employee will pay income tax at their highest rate on the amount the company pays toward their PMI premiums.

Here's an example to illustrate.

Example:

Let’s say Josh is a 40% taxpayer, and his employer pays £1,500 of his annual PMI premium. His taxable benefit is £1,500.

To calculate his tax bill:

Josh will pay 40% of £1,500, which equals £600 (£1,500 x 40%).

This means the employee will be taxed at their top rate based on the employer-paid portion of the premiums. In this example, Josh would pay £600 in tax. The amount is typically calculated by your accountant using the P11D form.

3. The Tax Implications of Personal PMI Policies

For personal private medical insurance policies, sometimes referred to as consumer policies, there are no tax implications for either the company or the individual, other than Insurance Premium Tax (IPT). Whether the premiums are paid personally or through the business, the only tax implication is the IPT, which at the time of writing this article remains at 12% and is added automatically to the premium you pay.

Why is Insurance Premium Tax (IPT) the only tax applied to personal policies?

Personal policies are paid from after-tax income, so neither the company nor the employee incurs additional tax liabilities related to the premium.

Final Thoughts

Now that you have a clearer understanding of the tax implications associated with company-paid PMI policies through insurers, you can make more informed decisions when renewing or setting up your company’s coverage. To recap:

• For your company, you’ll need to account for IPT, Class 1A NICs, and potential corporation tax offsets.

  
  

• For your employees, PMI premiums paid by the company are treated as a taxable benefit-in-kind, subject to income tax.

  
  

• For personal PMI policies, the only tax implication is the IPT.

  
  

If you need more clarity on how these tax implications apply to your business or employees, you may want to consult with a regulated health insurance broker. A broker can typically provide guidance on the most suitable options for your needs and may help navigate the complexities of employee benefits and taxes.

Disclaimers:

Disclaimer 1: The information provided in this article is accurate as of April 13, 2025. However, all details are subject to change in the future based on updates to insurer terms, market conditions, or regulatory changes. For the most up-to-date information, please contact a broker or your insurer directly.

Disclaimer 2: The information provided in this article is intended for educational purposes only and should not be used as specific advice for any individual insurer or policy. For details regarding your specific policy, always refer to your insurer’s policy documents or contact a broker or your insurer directly for personalised assistance.

Disclaimer 3: This article assumes the policy is a company-paid private medical insurance (PMI) policy arranged through an insurer. If you choose to set up a company policy through other means—such as a trust—the tax implications may differ. For specific guidance, it is advisable to consult a regulated insurance broker or tax advisor.