Taxation implications for company paid healthcare for large employers

How Simplyhealth’s products are taxedThe following taxes affect companies who buy healthcare cover for their employees (rates quoted are correct as at April 2015):

Insurance Premium Tax (IPT) IPT is included in insurance contracts and is charged at 6% of the net premium. IPT cannot be reclaimed.

National Insurance Contributions (NIC) Employers are charged Class 1A NIC at 13.8% on the full value of taxable benefits, or Benefits in Kind (BIK), provided to their employees. Class 1A NIC will not usually be charged where employees’ earnings, including BIK, are less than £8,500 per annum.

Income Tax Employees receiving company paid healthcare cover will pay tax on the BIK value, which is the total cost to the employer less any amounts repaid by the employee. Tax is charged at the employee’s highest marginal tax rate (i.e. 20%, 40% or 45%), which is determined by total earnings including benefits.

Corporation Tax (CT) Companies pay CT on their profits at 20%. The costs of providing employee benefits are allowed as deductions from profit for CT purposes, and so reduce the amount of CT payable.

Value Added Tax (VAT) VAT is charged at 20% on non-insurance Administration Services; many companies are able to reclaim the VAT they pay through their VAT return.

Different taxes may apply depending on the type of healthcare cover.

Simplyhealth Healthcare Plan Option

Health Cash Plan

A low cost health benefit that helps employees with the cost of their everyday healthcare

Private Medical Insurance (PMI)

A flexible way for companies to help their employees at times of ill health

Cost Plus Insurance Plan

A viable alternative for employers providing private healthcare for 400 employees or more. It combines the security of an insured product with genuinely flexible bespoke solutions and expert cost management

Self Funded Health Plans

Health Care Trusts and Scheme Agreements 1

Suitable for large employers with 500 employees or more. These plans can be fully tailored to a company’s own requirements or included in Simplyhealth’s Vitality Trust to receive excellent health cover with the benefit of expert cost management

Taxes:

Valued Added Tax (VAT)

Does not apply Does not apply Does not apply Applies at 20% on policy administration services

Insurance Premium Tax (IPT)

Included in the premium at 6%

Included in the premium at 6%

Included in the premium at 6%

Does not apply2

National Insurance Contributions (NIC)

Applies to the total amount funded by the employer, at 13.8%

Applies to the total amount funded by the employer, at 13.8%

Applies to the total amount funded by the employer, at 13.8%

Applies to the total amount funded by the employer, at 13.8%

Income Tax Applies to the Benefit in Kind (BIK) value, at the employee’s usual rate

Applies to the Benefit in Kind (BIK) value, at the employee’s usual rate

Applies to the Benefit in Kind (BIK) value, at the employee’s usual rate

Applies to the Benefit in Kind (BIK) value, at the employee’s usual rate

Corporation Tax (CT) Applies to Total Taxable Profits as reduced by BIK and NIC paid for by the company at the company’s relevant rate

Applies to Total Taxable Profits as reduced by BIK and NIC paid for by the company at the company’s relevant rate

Applies to Total Taxable Profits as reduced by BIK and NIC paid for by the company at the company’s relevant rate

Applies to Total Taxable Profits as reduced by BIK and NIC paid for by the company at the company’s relevant rate

Benefit in Kind (BIK) calculated as:

Premium paid for by the employer less amounts paid for by the employee

Premium paid for by the employer less amounts paid for by the employee

Total contract sum (including stop loss cover if applicable) divided by number of employees covered, apportioned as per benefit levels granted. The BIK is reduced by any amounts paid for by the employee

Total contract sum (including stop loss cover if applicable) divided by number of employees covered, apportioned as per benefit levels granted. The BIK is reduced by any amounts paid for by the employee

1 Simplyhealth’s Trust and Scheme Agreement arrangements are fully compliant with Her Majesty’s Revenue & Customs guidance under EIM21772

2 Trust / Scheme Agreements sometimes have stop loss Insurance attached. This is a separate insurance policy and not part of the Trust / Scheme Agreement itself.

Taxation examples Please consider the following as illustrations only of the overall cost to a company of providing their employees with a healthcare benefit, including the potential saving in corporation tax after deducting from profit as a business expense.

Health Cash PlanSmith & Sons provide all of their employees with a company paid health cash plan costing £2 per employee per week, or £104 per year. The information below shows the usual taxation cost and benefit effects for both the employer and its employees.

Total cost of providing the Health Cash Plan

Amount due Calculated as

Net premium £98.11

Insurance Premium Tax £5.89 6% of net premium

Total premium due to insurer (Benefit in Kind value)

£104

Cost of Class 1A NIC £14.35 13.8% of cost to employer

Cost to employer before CT saving £118.35

Less: Corporation Tax saved (£23.67) 20% of gross premium plus NIC paid

Net cost to employer (per employee) £94.68

Cost to basic rate taxpayer

Income Tax (annual amount) £20.80 20% of BIK value

Income Tax - monthly amount £1.73

Cost to higher rate taxpayer

Income Tax (annual amount) £41.60 40% of BIK value

Income Tax – monthly amount £3.47

Cost to additional rate taxpayer

Income Tax (annual amount) £46.80 45% of BIK value

Income Tax – monthly amount £3.90

Private Medical Insurance (PMI)Mr Jones is a manager who earns £45,000 a year and pays tax at 40%. He is provided with a company funded private medical insurance scheme that costs his employer £1,060 a year, inclusive of IPT. The information below shows the taxation cost and benefit effects for both Mr Jones and his employer.

Amount due Calculated as

Cost to Mr Jones

Income Tax (annual amount) £424.00 40% of cost to employer (BIK value)

Income Tax – monthly amount £35.33

Total cost of providing PMI

Net premium £1,000.00

Insurance Premium Tax £60.00 6% of net premium

Total premium due to insurer (BIK value) £1,060.00

Cost of Class 1A NIC £146.28 13.8% of cost to employer

Cost to employer before CT saving £1,206.28

Less: Corporation Tax saved (£241.26) 20% of gross premium plus NIC paid

Net cost to employer £965.02

Cost Plus Insurance PlanThe Jones Partnership chose a bespoke cost plus insurance plan to include cover for existing and retired partners for benefits agreed with their insurer. They wanted to ensure that the total cost of health cover did not exceed £1.5m and so agreed an aggregate stop loss insurance at 120% of the estimated claims fund.

The table below shows the usual taxation cost and benefit effects for the Partners.

Total Plan cost: 200 Partners, 1,000 employees (estimated figures only, these are bespoke plans and individually underwritten)

Expected annual cost: £1,200,000

calculated as:

Estimated Total Claims Cost: £1,066,575

Aggregate stop loss premium: £17,500

Admin fee: £48,000

IPT @ 6%: £67,925

Plan value per Member £1,000.00

Taxable as income from Partnership / BIK £1,000.00

Cost to Partner who is Basic Rate Taxpayer

Income Tax (annual amount) £200.00 20% of cost to Partnership (inc IPT)

NIC (annual amount) £90.00 9% of cost to Partnership (inc IPT)

Total tax payable £290.00

Cost to Partner who is Higher Rate Taxpayer

Income Tax (annual amount) £400.00 40% of cost to Partnership (inc IPT)

NIC (annual amount) £20.00 2% of cost to Partnership (inc IPT)

Total tax payable £420.00

Cost to Partner who is Additional Rate Taxpayer

Income Tax (annual amount) £450.00 45% of cost to Partnership (inc IPT)

NIC (annual amount) £20.00 2% of cost to Partnership (inc IPT)

Total tax payable to purchase £470.00

Amounts paid on behalf of employees of the Partnership are deductible as expenses of the Partnership. For employees of the Partnership the tax position is the same as in example 1 or 2 above. P11D liabilities are usually adjusted in the subsequent year to reflect the difference between the estimated cost of the plan and the actual final cost.

Healthcare TrustMarwell Aeronautical Ltd wanted to provide their employees with their own unique private health cover. They designed their plan to include benefits specifically to cover the particular needs of their workforce. They wanted the plan to be their own and decided to use a Healthcare Trust to provide their employees with this cover. The company decided not to purchase aggregate stop loss cover. The costs and benefits to the company and its employees under the Trust arrangement are as shown below.

Total Plan cost: 500 employees (estimated figures only, these are bespoke plans and individually underwritten)

Expected annual cost: £475,8003

calculated as:

Estimated Total Claims Cost: £450,000

Admin fee: £21,500

VAT @ 20% on admin fee: £4,300

Plan cost per employee £951.60

NIC 13.8% 4 £131.32 13.8% of cost to employer

Less: Corporation Tax saved 4 (£216.58) 20% of gross premium plus NIC paid

Net cost to employer per employee £866.34

Benefit in Kind – P11D value £951.60

Cost to Basic Rate Taxpayer

Income Tax (annual amount) £190.32 20% of cost to employer

Income Tax – monthly amount £15.86

Cost to Higher Rate Taxpayer

Income Tax (annual amount) £380.64 40% of cost to employer

Income Tax – monthly amount £31. 72

Cost to Additional Rate Taxpayer

Income Tax (annual amount) £428.22 45% of cost to employer

Income Tax – monthly amount £35.69

3 Expected annual cost includes VAT. If VAT is recoverable then tax will be paid on the net amount. 4 All tax rates are the normal rate as at April 2015. The Government may announce a change in these rates. P11D liabilities are usually

adjusted in the subsequent year to reflect the difference between the estimated cost of the plan and the actual final cost.

Scheme AgreementValley Cabling wanted a cost efficient, flexible scheme to provide cover for their employees, who have a right to healthcare benefits included in their employment contracts. They chose a Scheme Agreement with additional aggregate stop loss cover to limit their maximum risk if claims exceeded 120% of the expected claims cost.

The costs and benefits of this are shown below.

Total Plan cost: 2,000 employees (estimated figures only, these are bespoke plans and individually priced)

Expected annual cost: £1,902,5503

calculated as:

Estimated Total Claims Cost: £1,800,000 Aggregate stop loss £17,500 IPT @ 6% on stop loss £1,050 Admin fee: £70,000 VAT @ 20% on admin fee: £14,000

Plan cost per employee £951.28

NIC 13.8% 4 £131.28 13.8% of cost to employer

Less: Corporation Tax saved 4 (£216.51) 20% of gross premium plus NIC paid

Net cost to employer per employee £866.05

Benefit in Kind – P11D value £951.28

Cost to Basic Rate Taxpayer

Income Tax (annual amount) £190.26 20% of cost to employer (inc IPT)

Income Tax – monthly amount £15.86

Cost to Higher Rate Taxpayer

Income Tax (annual amount) £380.51 40% of cost to employer (inc IPT)

Income Tax – monthly amount £31.71

Cost to Additional Rate Taxpayer

Income Tax (annual amount) £428.08 45% of cost to employer (inc IPT)

Income Tax – monthly amount £35.67

3 Expected annual cost includes VAT. If VAT is recoverable then tax will be paid on the net amount. 4 All tax rates are the normal rate as at April 2015. The Government may announce a change in these rates. P11D liabilities are usually

adjusted in the subsequent year to reflect the difference between the estimated cost of the plan and the actual final cost.

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This communication is directed at commercial customers only and is not aimed at consumers. Please note that these examples are for illustrative purposes only. They are not intended to constitute tax advice, but are a representation of current legal provisions. For specific advice on how this affects your company, you should speak to your Tax Advisor or your local HM Revenue and Customs office.

Further information on tax rates and how this affects you can be found at:

www.hmrc.gov.uk

Simplyhealth is a trading name of Simplyhealth Access, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Simplyhealth Access is registered and incorporated in England and Wales, registered no. 183035. Registered office, Hambleden House, Waterloo Court, Andover, Hampshire, SP10 1LQ. Your calls may be recorded and monitored for training and quality assurance purposes.