If you are employed by a company then any benefits or ‘perks’ you receive from them may be subject to tax, along with your monthly paycheque. Two of the most common examples are a company car and health insurance. In these instances, the company should provide you with information about the financial value of these benefits in your tax code. The correct amount of tax is then deducted in the normal way through PAYE (Pay As You Earn).
For example, if you receive health insurance as a perk of your employment, this is deducted from your personal allowance – effectively reducing your tax-free income. For the tax year 2011-2012, the personal allowance is £7,475. If the value of the insurance is £600, your allowance is decreased to £6,875. The same process applies for any other relevant benefits.
Health insurance for the self-employed
Being self-employed has advantages and disadvantages. Along with greater flexibility of work, there are downsides such as losing paid holiday, sick pay, maternity or paternity leave, and having to pay your own national insurance and pension contributions. Illness can be a particular problem, since if you cannot work then you don’t get paid. The effects of this can be devastating for a small business. It is therefore wise for self-employed contractors to purchase health insurance, as well as critical illness cover. This ensures that they will be seen and treated promptly and at their convenience, rather than waiting for appointments on the NHS.
Unfortunately, health insurance tends to be more expensive if you are self-employed. In a company scheme, economies of scale operate and the business can often purchase health insurance for a group of employees at favourable rates. This is not the case if you work for yourself.
The result is not only an increased need for health insurance, but higher premiums. This can leave self-employed people in a double bind, unable to pay the prohibitively high fees but knowing that their business could go under if they don’t.
Self-assessment tax and health insurance
The good news is that the tax situation is dealt with a little differently if you are self-employed. Usually, you can offset the costs of health insurance against your income for tax purposes. This arguably puts you in a more favourable position than someone who is employed by a company: rather than being taxed on the value of their health insurance and other perks, you are able to deduct it from your income. Some insurers offer specific policies for those who are self-employed.
Nevertheless, you may find that the payments are still an unacceptable cost, especially if you are just starting out with your new business and income is low. This puts you in a difficult position, since you will be even less able to afford time off work than you will once your company has taken off. One alternative if you are married is to check whether you are able to secure health insurance through your spouse’s employment. Many companies allow employees to add their spouse to their policy at a comparatively favourable rate. Additionally, if you are thinking about leaving your job to start your own business, you can take advantage of COBRA (the Consolidated Omnibus Budget Reconciliation Act) health coverage. By law, if you receive health insurance through your work, you should continue to be covered for a certain amount of time after you leave.
Lastly, if none of these options are available in your circumstances, you may still be able to bring your health insurance premiums down by paying annually rather than monthly. Although you will need to plan your cash-flow more carefully, this option is often cheaper overall.
This article was supplied by the leading firm of Irish insurance brokers, Robertson Low, established in 1995 and the only Irish incorporated ‘Lloyd’s broker’