How are benefits from an employer-sponsored income protection insurance policy taxed?

Benefits from an employer-sponsored income protection insurance policy are generally paid through the Pay As You Earn (PAYE) system, making them subject to income tax. This taxation occurs because the premiums for such policies are often paid by the employer as part of the employee’s remuneration package, meaning the benefits are considered taxable income when received by the employee.

When an employer pays for insurance coverage, the premiums are deducted from the employer's taxable profits, which effectively shifts the tax burden to the employee when they claim benefits. As a result, the payments made under these policies are taxed as they fall under the regular income category, impacting the net amount received by the individual claimant.

Other options do not accurately reflect the tax treatment of these benefits. While some policies may have unique terms, the standard taxation framework for employer-sponsored income protection typically aligns with the PAYE system.