Perspective: A self-defeating policy

Is now the time for sensible reform of taxation of company-paid PMI?

With the UK facing an ever growing public debt burden, and the government squeezing public sector spending, a new approach to funding healthcare may be required to maintain NHS services. Well-targeted incentives for employer funded medical care would have a positive effect on the public finances, by relieving pressures on over-stretched NHS budgets, and with prompt access to treatment resulting in lower welfare costs for the government.

Currently however, private medical insurance (PMI) is a highly taxed benefit for both employers and employees, whereas other company- paid group schemes, such as pensions and income protection (IP), are not taxed.

Company-paid PMI is taxed in three ways: insurance premium tax; employer’s class 1A National Insurance; and a benefit-in-kind P11D charge on the employee, at their marginal rate of tax.

Figures released by HM Revenue & Customs (HMRC) in March 2009, covering 2006-07, show that medical insurance is the second largest benefit in kind (by value), after company cars. In 2006/07 there were 2.26 million employee recipients of company paid medical insurance, with a taxable benefit value of £1.33bn. The various taxes on this generated an estimated £650m for the Exchequer.

In addition, these figures relate to those cases where PMI is reported as a separate P11D benefit to HMRC. Many larger employers have individual dispensations with HMRC for reporting P11D benefits, whereby they can report just a single average figure for employees for all benefits, rather than having to list them out separately. Therefore, the final tax take for the Exchequer is likely to be higher. Furthermore, although employers can get corporation tax relief on the premium and Class 1A National Insurance paid, this may not always be available if the employer is a smaller business or not a limited company.

Tax on private medical care does not just relate to insurance. An employer may fund private treatment to get an employee back to work where there is a long NHS waiting list. HMRC guidance states there is no P11D tax or Class 1A National Insurance charge for “medical treatment or insurance solely related to injuries or diseases that result from the employee’s work”. So a professional footballer requiring knee surgery for a injury sustained on the pitch will have no tax charge, whereas an office worker who is off work for several weeks with an injury sustained over the weekend creates a tax charge if his employer pays for private treatment to get him back sooner. For some types of treatment this could result in a P11D tax bill for the employee of many thousands of pounds.

The current arrangement is a perfect example of taxation working against the good intentions of other government departments. Dudley Lusted, head of corporate healthcare at AXA PPP healthcare agrees.

“We have long called for a change to the way the current tax regime works as there is a clear inconsistency when employees need rehabilitation following a medical problem not caused by work,” he says. “This particularly applies when an employee is unable to work while waiting for treatment. In these circumstances a tax liability for the employee arises when the employer funds private treatment. No such tax liability arises however if a similar problem is caused by work. Surely it is the medical problem that needs resolving irrespective of the cause.”

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