Income protection premiums & tax

Posted by: Conor Sligo on 26 May 2007

If you are paying income protection premiums or are thinking about starting an income protection plan, one thing to get right is tax.

A tax deduction on your premiums might be attractive, but make sure that you understand clearly the deductions you are claiming - in particular make sure that your premiums actually are deductible.

Broadly speaking, there are two kinds of income protection cover that you can choose. With one kind you can insure up to 55% of your gross income, with the other up to 75%. With the 55% option, the payment that you receive if you need to claim is not designed to be taxed, while the payment received from the 75% option will be taxed.

In a similar way, the premiums for the first kind of income protection are not designed to be tax deductible, and the premiums for the second option are designed to be deductible.

The two types of income protection are suitable for different situations - just as you should never make an investment decision based solely on tax, don't choose an income protection plan just because you can claim a tax deduction. Talk to your adviser about which kind of income protection plan is right for you - and whichever you choose, be sure to clarify the tax position.