Contractors’ Questions: Is it tax efficient to put private health insurance through your limited company?

Contractor’s Question: Is it more tax-efficient to put private health insurance through your limited company than to pay for it personally?

Expert’s Answer: Many employees receive employment-based sickness packages, whether it’s a generous sick pay arrangement or private medical insurance. But, when you are contracting, you need to arrange for these provisions yourself and it is a common question from both new and existing contractors alike whether it’s better to pay personally or via your own company.

The answer is rarely simple and can depend upon your circumstances, but the first point to remember is that as the cost is met from your overall earnings. The cost of the premium is normally the same but it’s the resulting tax cost that can vary. Looking at this from the point of view of the gross contracting income used up in meeting the cost is the only way to get the right overall answer.

If your company pays the premium it is a benefit in kind. The company will have to pay 13.8% Class 1A National Insurance and you will pay income tax on the cost of the premium. The income tax depends on the rate of income tax you pay and whether it has any effect on losing personal allowances should your taxable income exceed £100,000.

Of course, if you pay the premiums personally there is no benefit in kind, but you are meeting the cost out of net of tax income. The tax liability depends whether you meet the cost out of income taxed at basic rate, higher or additional rate, and whether out of dividends or salary. As an example, to meet a cost of £1,200 from dividend income taxed at the higher rate (32.5%), you would need to receive dividends of £1,778. But as dividends are paid out of net of corporation tax profits, you would need to have earned £2,195 in the company.

If the dividends used to meet the premium cost were only taxed at 7.5%, then the overall cost is considerably less at £1,601 of your contracting income.

Compare this with the company paying, the premium cost remains at £1,200 plus the Class 1A NI of £166, a total cost of £1,366, less corporation tax relief of £260. You would be taxed personally at 40% of the value of the benefit being £480 and that tax cost would need to be met from dividend income, using the same principles above, using up £878 of contracting income. So, the total cost to the company is £1,984. This is less than paying personally.

If your income is within the basic rate the benefit is £240, and that requires gross income of £320 before corporation and dividend tax to meet the cost.

As the detailed calculations depend on personal circumstances, we would always advise talking it through with your accountant so you can get a personalised summary of the implications.

The expert was Duncan Strike, senior director of Intouch Accounting

Editor's Note: For more information or for a quote on private health insurance for contractors from specialist provider WPA please visit our medical cover page.