Medical insurance is fast becoming a standard perk for employees but P11D is putting off some employers. Sam Barrett scrutinises the tax situation and questions whether or not it is short-sighted
Medical insurance used to be a perk reserved for the board but today's employers are increasingly offering it to a wider group of employees, using it as a tool to reduce sickness absence and boost the productivity and profitability of their businesses. In spite of this shift, the tax office continues to treat healthcare as a benefit-in-kind, slapping on tax for the employee and national insurance for the employer.
Unsurprisingly, this is seen as unfair by many in the health insurance industry. Medical insurance and cash plans are regarded as complementary to the NHS, taking some of the strain off its services. Raman Sankaran, head of marketing at cash plan provider Healthsure, explains: "Cash plans work hand in hand with the NHS," he says. "The NHS doesn't provide everything we need - for example, dental treatment - so employers should be encouraged to offer their employees cash plans to help bridge the gap."
Many also criticise the finances involved. Iain Laws, healthcare manager at employee benefit adviser Gissings, says: "Employers already pay national insurance and insurance premium tax on the employee premiums for a benefit they frequently believe removes cost from the NHS. It is startling to consider that, for a higher rate taxpayer, the government will collect tax and national insurance equivalent to nearly 60% of the premium paid by the employer."
It is not just insurers and brokers that are unhappy about the current tax situation - it is a common gripe among employers and employees too. "Some employers are reluctant to introduce benefits because they would have to start completing P11D paperwork for their employees," says Mr Sankaran. Furthermore, having to pay additional tax can be a deterrent, especially for younger employees with lower salaries.
"This is the group we particularly want to attract," says Andy Santoni, private medical insurance product manager at First Assist. "The more younger lives we cover, the better the spread of risk and the lower the premiums."
Compared with other countries, the UK situation also seems hugely unfair. For instance, in Ireland, tax credits are available when taking out medical insurance; whereas Australia has a higher tax rate for those without cover. And ill or injured employees that are unable to work while they wait for NHS treatment are not good news for the economy either.
Figures from the Confederation of British Industry/Axa Absence and Labour Turnover Survey show that absence costs UK employers £12.2bn in 2004 in direct costs. Although short-term absence, such as colds and flu, made up two-thirds of this, long-term absence, which includes times when employees are on waiting lists, accounted for more than £4bn.
"Absence from work hurts UK PLC," says Mr Santoni. "The government should weigh up the tax revenue for products that alleviate this, against the loss of productivity."
There are some cases where healthcare benefits are not liable for tax and, increasingly, providers are looking at ways to incorporate these exemptions into their products.
Firstly, where the cost of a benefit is low it can sometimes be possible to get a tax let-off. For example, according to Richard Arden, head of finance at cash plan provider Westfield, its corporate customers have had some success at securing exemptions for their cash plans. "It depends on the local tax office but schemes with an annual premium of £50 to £60 per employee mean many offices consider it more effort to collect the tax than it's worth," he explains. For a basic rate taxpayer on a £50 a year cash plan, Her Majesty's Revenue and Customs would collect just £11.
This argument does not really work for medical insurance, however. With annual premiums on traditional plans standing at around £450, the tax is certainly worth collecting.
Another exemption exists that can apply to both cash plans and medical insurance. This states that where an injury or illness is caused by work, there is no benefit-in-kind tax charge on the cost of any treatment that is intended to return the employee to their former state of health. For instance, Mr Arden says Westfield has put together non-standard policies that deal specifically with injuries caused by work.
It is not always clear whether or not an illness is caused by work, however. Steve Clements, principal at human resources consultancy Mercer, points to mental health as one of the main causes of long-term absence. "It can be difficult to determine whether this is caused by work or by external factors. Very often it's not a single cause," he says.
Additionally, the number of claims for the treatment of work-related injuries is only small. Dudley Lusted, head of corporate healthcare development at Axa PPP healthcare, says only a couple of percent of medical insurance claims are for the treatment of injuries or illnesses caused by work. "Part of the reason for this is that most medical insurance schemes cover white-collar employees. The rate would be higher if schemes were extended to blue-collar employees but it would still be fairly trivial," he adds.
With such a small incidence of work-related claims, it is probably not viable to differentiate between the two for tax purposes. Just like HMRC when it comes to collecting small amounts of tax, it is simply not worth the administration hassle or the expense.
Employers can structure schemes so that they do not have to deal with the paperwork associated with P11D. To do this they could set up a voluntary scheme, with employees meeting the cost of the premium themselves but being compensated for with an enhanced salary. This is not really any better than providing it as a benefit-in-kind in the first place, says Mr Laws: "The salary increase would be subject to relevant taxes and national insurance, which, in all likelihood, would increase the overall cost to the employer."
New product design
Insurers are designing new products that take advantage of the exemptions available. Earlier this year, HSA launched Work Well, a company-paid cash plan that segregates its benefits for pricing purposes, enabling part of the premium to be exempt from P11D taxation.
The exempt segment of the cover, which includes an employee assistance programme and some optical benefits, accounts for between £30 and £40 of the total premium, depending on the cover level. For example, with a scheme costing £60 a year, £30 of the premium will be for these exempt benefits, leaving the employee liable for tax only on the remaining £30 a year. For a basic rate taxpayer, this would mean an additional tax liability of £6.60, which some local tax offices may deem too low to be worth collecting.
Norwich Union is also about to launch an income protection product that includes medical insurance and that could be considered exempt from benefit-in-kind taxation. Developed in association with Gissings, it provides employees with access to medical insurance in cases where the cost of private treatment is less than the direct cost of absence if they had to wait for NHS treatment.
This effectively extends the way income protection currently works so that in addition to using private medical treatment to reduce the length of time of a claim, medical insurance will also pick up the tab for the treatment of conditions that might never have become income protection claims.
However, because the eligibility criteria is more restricted than on a traditional product, the cost of the medical insurance element is significantly cheaper at £100 a year per employee. Additionally, because it is regarded as an absence management tool for the employer's benefit, it is potentially exempt from tax.
Mark Noble, head of intermediary sales at Norwich Union Healthcare, explains: "An exemption was achieved for the scheme we are piloting in Wales but we're not launching it as exempt. Instead, we'll recommend that employers approach their local tax office to see if they can get an exemption for it."
Although the motivation behind the provision of healthcare benefits has changed dramatically, it is extremely unlikely HMRC will give up the revenue stream it gets from healthcare benefits. "The £8500 threshold has been in place for as long as I can remember," says Mr Lusted. "It used to represent a high salary but now a large segment of the workforce will be caught by it."
It is also a hidden tax - with the government committed to a substantial spending programme to reform the NHS, it's a lot easier to collect tax this way than to stick another 1p on income tax.
Time to lobby
Yet, with healthcare benefits as much an employer tool as an employee benefit, it may be time for HMRC to reconsider its position on the taxation of such benefits. "There are more and more grey areas arising in what is subject to P11D. We need a clear statement from HMRC on the tax treatment of healthcare benefits," says Mr Santoni.
Rather than go for an all-or-nothing situation, a compromise may be possible. For example, Mr Lusted believes that instead of looking at how the injury or illness is caused, HMRC should consider the motivation for having the benefit. "I wouldn't expect a waiver for schemes where cover is given to a select few, such as the management; however, where a company covers everyone and uses the scheme to get people back to work, then it would make sense to have a less punitive tax regime," he says.
According to his own research, around 30% of claims are for treatment for conditions that actually stop people from working. From an employer's perspective, whether work caused the illness or injury or not, the end-result - an inability to work - is still the same. Being penalised for attempting to curb this drain on productivity does seem incredibly unfair.
THE TAX TREATMENT OF EMPLOYEE BENEFITS
Whether employees are remunerated in hard cash or benefits, such as medical insurance and company cars, the tax office will want its share.
To ensure it gets what it is owed, Her Majesty's Revenue and Customs simply adds the value of the benefit to the employee's annual salary and, providing this is greater than £8500, taxes it at the employee's highest rate. For example, if an employee earns £12,000 and their employer pays £350 a year to provide them with medical insurance, they would face a further tax liability of 22% of the £350, which would be equal to £77.
In addition to the tax paid by the employee, the employer is also liable for national insurance on the value of the benefit they provide their employee.
Not all healthcare benefits are subject to tax, however. Anything that is required under employment law is exempt. An example of this is an employee assistance programme, which helps the employer meet its duty of care responsibilities.
Some healthcare screening programmes would also be exempt, providing they are for the benefit of the employer rather than the employee. "As a rough rule of thumb, it would be exempt if the employer required a copy of the report; for example, for pre-employment screening or where the employer must screen employees for industrial injuries or illnesses," says Jan Lawson, managing director of medical insurance specialist The Private Health Partnership.
Additionally, there are exemptions for the cost of treatment for injuries and illnesses that are caused by work; for example, if a builder falls from scaffolding, and some employers have succeeded in obtaining exemptions for schemes where the annual premium is small.
- Roundtable: Is a single customer view taking off in insurance?
- O’Connor replaces Fairchild at the helm of Broker Network
- Analysis: The mystery of the missing Insurance Fraud Taskforce report
- Green light for UK-US insurance trade deal
- Travel insurtech Pluto begins beta test
- Home insurance insurtech Buzzvault launches
- Majority of customers support a ban on dual pricing