Is Income Protection Taxable in Ireland?

Income protection insurance is a crucial safety net for anyone who might lose their ability to earn due to illness or injury. 

This type of insurance provides you with a regular income when you’re unable to work due to illness, ensuring financial stability during tough times. 

In Ireland, the payments you receive from income protection insurance are indeed subject to income tax.

While many understand the benefits of such coverage, there’s often confusion about the tax implications associated with these payments.

It’s important to understand how these benefits are taxed and what relief might be available on the premiums you pay. Understanding the tax side of income protection can save you surprises and make sure you’re fully utilising the benefits of your policy. 

In this blog, we will help you to find out if income protection are taxable in Ireland and learn about taxability, tax relief, & common misconceptions of income protection.

Let’s start discovering the specifics!

What Should You Understand About Income Protection Insurance?

Income protection is a crucial tool for managing life’s uncertainties. By ensuring a steady income flow during periods of ill health, it helps maintain your financial stability and protects your future.

Definition and purpose

Income protection insurance is designed to provide you with financial support if you are unable to work due to illness or injury. Essentially, it acts as a substitute for your salary during periods where you’re unable to perform your job duties. 

This type of insurance is crucial for anyone who relies on their earnings to support themselves and their families, offering peace of mind that you can maintain your standard of living even if you temporarily lose your income.

Benefits provided

The key benefit of income protection insurance is that it pays out a percentage of your regular income, up to a maximum of 75% of your income, less any Illness Benefit you’re eligible for, depending on the policy’s terms.

Generally when you are purchasing your income protection policy there is a deferment period. 

In income protection insurance this refers to the initial period after you become unable to work due to illness or injury where you will not receive any benefits from the policy. 

This is essentially a waiting period, and it can range from a few weeks to several months, depending on the specific terms of your policy. The longer the deferment period the cheaper the policy premium. 

When choosing a deferment period, remember that your savings or your employer’s own sick pay policy will be needed to cover your costs until your claim can begin. Don’t make your deferment period longer than you can afford to cover with your own funds. 

These payments continue until you can return to work or, in some cases, until you retire or the policy term ends. The objective is to lessen the financial burden during recovery, allowing you to focus on your health without the added stress of financial burden.

What is The Taxability of Income Protection Payments?

These aspects highlight the importance of understanding how your income protection payments will impact your overall tax situation. 

How are income protection payments taxed?

In Ireland, the payments you receive from income protection insurance are indeed subject to income tax. These benefits are treated like any other form of income, meaning they fall under the PAYE (Pay As You Earn) system. 

This means that when you receive your income protection payout, it’s taxed in the same way as your regular salary would be. The tax is deducted at source by the insurance company before the money ever reaches your bank account.

Adjusting your tax credits and standard rate cut-off point

Since income protection payments are taxable, it’s essential to adjust your tax credits and standard rate cut-off point accordingly. 

You may need to contact Revenue to update your tax records to ensure that your payments are being taxed correctly and that you are not overpaying or underpaying tax. Keeping your tax details up to date will help avoid any unexpected tax bills at the end of the year.

What is The Tax Relief on Premiums Paid?

Understanding how to obtain tax relief on your income protection insurance premiums can make the coverage more cost-effective.

Eligibility for tax relief

In Ireland, you’re eligible for tax relief on the premiums you pay for income protection insurance. This relief is available at your marginal rate of tax, which means you can claim back a significant portion of the cost, making the insurance more affordable. 

The relief is applied directly to your premiums, reducing the amount you pay out-of-pocket. It’s essential to ensure that your income protection policy qualifies for this relief under Irish tax laws.

How to claim tax relief?

Claiming tax relief on your income protection insurance premiums is straightforward. 

You simply include the amount paid on your annual tax return under the section for health and life insurance premiums. You need to keep records of the premiums paid throughout the year as proof, in case of an audit. 

The relief is claimed at your highest rate of tax, which could be up to 40%, significantly reducing the net cost of your coverage.

Example 1

• Aine is 35, a non-smoker, and earns €48,000 per year.
• She insures 75% of her yearly income, or €36,000 per year, with a Deferred Period of 13 weeks.
• Aine’s premium is €108 per month or €1,296 per year.
• She can claim tax relief at her marginal rate of 40%, which means that the net cost of her monthly premium is €65.

Example 2

• John is 40, smoker, and earns €66,000 per year.
• He insures 60% of her yearly income, or €39,600 per year, with a Deferred Period of 4 weeks.
• Johns premium is €297 per month or €3,564 per year.
• He can claim tax relief at her marginal rate of 40%, which means that the net cost of her monthly premium is €178.

What Are the Common Misconceptions About Income Protection?

These clarifications help set the right expectations and enable better financial planning for those relying on income protection insurance. 

Understanding the tax obligations and benefits can lead to more informed decisions about purchasing and maintaining these policies. 

Misconception: Benefits are not taxed

A widespread misunderstanding is that the benefits received from income protection insurance are not subject to taxes. 

In reality, these benefits are treated as taxable income in Ireland. When you receive payments under an income protection policy, they are subject to income tax, Universal Social Charge (USC), and Pay Related Social Insurance (PRSI) just like your regular salary. 

It’s important to factor this into your financial planning to avoid unexpected tax bills.

Misconception: Premiums are fully tax-deductible

Another common confusion is regarding the tax treatment of the premiums paid towards income protection insurance. 

While it is true that you can claim tax relief on these premiums, the relief is not at 100%. You can claim tax relief at your marginal rate of tax, which means the actual cost of your premiums is reduced by your top rate of tax, either 20% or 40%. 

This relief is not automatically applied; you must claim it through your tax return.

Conclusion

Income protection insurance in Ireland is indeed taxable, and understanding this is essential for anyone relying on this safety net. The benefits received are subject to income tax, USC, and PRSI, much like your regular salary, while the premiums paid are eligible for tax relief at your marginal tax rate. 

Knowing these facts helps ensure that you’re not caught off guard by unexpected taxes and can fully benefit from the tax reliefs available.

If you need further clarification or assistance in managing the tax implications of your income protection insurance, don’t hesitate to contact Greenway Financial. Our experts are here to help you navigate these complexities and optimise your financial planning.

FAQs

Is income protection taxable in Ireland?

Yes, income protection benefits are taxable in Ireland. Payments received from an income protection policy are considered a replacement for your regular income and are therefore subject to income tax, Universal Social Charge (USC), and Pay Related Social Insurance.

Can I claim tax relief on income protection premiums? 

Yes, you can claim tax relief on income protection premiums at your marginal rate of tax, which could be up to 40%. This makes the cost of premiums more affordable​.

How do I claim tax relief on income protection premiums? 

You can claim tax relief through the Revenue’s myAccount service. Log in, navigate to “Manage Your Tax,” and then to “Claim Tax Credits” under the “Health” and “Income Continuance” sections​.

Is income protection tax-deductible for self-employed individuals? 

Yes, self-employed individuals can also claim tax relief on income protection premiums. The relief is typically claimed when filing the annual tax return​.

Are employer-paid income protection premiums taxable?

Where the premiums are for an unapproved policy or scheme, the premiums paid by the employer are taxable.

What types of income protection policies exist? 

There are various types of income protection policies, including individual policies where you pay the premiums, and group policies provided through your employer. The specific terms and conditions, including maximum coverage amounts, vary by policy​.