When it comes to financial planning, most of us are looking for ways to protect our income and make the most of any available tax reliefs. If you’ve taken out an income protection policy in Ireland—or you’re thinking about it—there’s good news: the premiums you pay may qualify for tax relief, which can make a big difference in your overall costs. But how does it work? Let’s break it down in simple, everyday language.
What is Income Protection?
First off, what is income protection? It’s an insurance policy designed to replace part of your income if you can’t work due to illness or injury. This isn’t the same as life insurance or health insurance. Instead, income protection steps in to provide you with a percentage of your salary while you’re unable to work—typically around 50-75% of your pre-tax income, depending on the policy. The idea is to give you financial support to cover essential living costs, like rent, bills, and groceries, while you focus on getting better.
How Does Tax Relief Work for Income Protection?
In Ireland, the government allows you to claim tax relief on the premiums you pay for your income protection policy. This means that some of the money you spend on your policy can be reclaimed through your tax returns. Essentially, you’re getting a discount on the cost of your protection, which makes it more affordable.
The rate of tax relief on income protection premiums is the same as your highest rate of income tax. For most people, this will be either 20% or 40%, depending on your income level. So, if you’re paying tax at the higher rate (40%), you can claim 40% tax relief on the premiums you pay. If you’re a standard-rate taxpayer (20%), you can claim 20%.
Let’s look at an example:
- If you pay €1,000 per year for your income protection policy, and you’re taxed at the higher 40% rate, you can claim €400 back in tax relief. This effectively brings the cost of your premium down to €600.
- If you’re paying tax at 20%, you would get €200 back on a €1,000 premium, reducing your real cost to €800.
In both cases, the tax relief makes the policy more affordable, meaning you’re paying less for peace of mind.
How to Claim the Tax Relief
Claiming tax relief on income protection in Ireland is pretty straightforward. Here’s a simple step-by-step guide:
- Make sure your policy qualifies: Not all insurance policies qualify for tax relief. Your income protection policy must be approved under Irish Revenue guidelines to be eligible. Most standard income protection policies offered by major insurers in Ireland will qualify, but it’s always worth checking with your provider.
MOJO Finance who specialises in this area and offer an information website www@protectyourincome.ie advise on personal income protection policies where tax relief is provided by the insurer.
- Notify Revenue: Once your policy is in place, you’ll need to inform Revenue (Ireland’s tax authority) that you are paying premiums on an income protection policy. This can be done by filling out a form called the Income Protection Tax Relief form (Revenue Form 12 or online through your Revenue MyAccount). You’ll need to provide details of your policy, such as the amount you pay in premiums each year and your insurer’s information.
When you put income protection in place through MOJO Finance, they will email your relevant income protection tax certificate at policy inception. This can then be uploaded when claiming your tax relief. You will also receive your tax certificate from the insurer.
- Claim through your tax return: You can claim the tax relief by including it in your annual tax return or, if you’re employed, through the PAYE system. The relief will either be applied to reduce the amount of tax you owe, or you might get a refund if you’ve already paid too much tax that year.
- Set up tax relief at source (optional): In some cases, you can arrange for tax relief to be applied at source, meaning your employer will facilitate payment of income protection through payroll. Here, monthly premiums are deducted from gross payroll and tax relief is applied at source.
- Key Benefits of Tax Relief on Income Protection
So, why is this tax relief such a big deal? Here are a few reasons it’s worth considering:
- Affordability: By reducing the cost of your premiums, tax relief makes it more affordable for people to take out income protection. This is especially important if you’re working on a budget but still want to protect your income.
- Peace of Mind: Knowing that you have financial protection if something unexpected happens is a huge relief. The added benefit of tax relief makes it easier to justify spending money on an income protection policy, since it doesn’t hit your pocket as hard.
- Long-Term Protection: Since income protection is usually a long-term policy that lasts for years, the tax relief adds up. Over time, you’ll save a significant amount of money on your premiums, which can be reinvested into other areas of your financial planning, such as retirement or savings.
- Note that you can clam the tax relief annually and it is even possible to claim back for the previous four years.
Important Points to Keep in Mind
While tax relief on income protection is a great benefit, there are a few things to be aware of:
- Payouts are taxed: If you ever need to make a claim on your income protection policy, the payouts you receive will be taxed as income. This means that the portion of your income replacement (usually 50-75% of your salary) will be taxed at your normal rate. While it’s not the full salary, it’s important to remember that the money you receive isn’t tax-free.
- Tax relief is only on income protection: Tax relief applies only to premiums for income protection policies. If you have other types of insurance, like life insurance or critical illness cover, these don’t qualify for the same tax breaks. Here we can clearly see that the government is incentivising those earning an income – to protect that income.
- Premiums can increase if you have not arranged guaranteed premiums at out: Over time and with certain insurers, your premiums may go up, depending on the terms of your policy and factors like age or inflation. However, even as premiums increase, you’ll still be able to claim tax relief at the same rate, which helps to manage the costs. MOJO Finance only advises on policies where monthly premiums are guaranteed through the life of the income protection policy. Where indexation is chosen, both the benefit amount and monthly premiums will increase incrementally year on year and usually at about 3%. Indexation can be a very useful feature to build into an income protection policy as it ensures that the benefit increases to keep in line with inflation and the cost of living.
Executive Income Protection
With Executive Income Protection the tax relief works differently. Executive Income Protection is paid for by a company and on behalf of employees.
Executive Income Protection is a popular choice for company directors and is designed to protect both the company and its owner or key staff.
Premiums on Executive Income Protection policies are a revenue approved tax-deductible expense.
MOJO Finance has vast experience in advising company directors and business owners in the mitigation of financial risk caused by long term illness or injury.
Conclusion
Income protection is a valuable safety net for anyone who wants to safeguard their financial stability in case they’re unable to work. In Ireland, the government’s provision of tax relief on these premiums makes it more affordable and accessible for many people. By reducing the cost of your premiums by up to 40%, this tax break allows you to protect your income without putting too much strain on your budget.
The key takeaway is that tax relief on income protection policies is a simple and effective way to lower your financial burden while ensuring that you and your family are protected if the unexpected happens. It’s worth exploring how this can fit into your financial plan and securing the relief to maximize your savings.
For more information, please send an email to hello@mojofinance.ie or visit www.protectyourincome.ie to request an income protection quote.