Legislation relating to the tax treatment of private medical insurance provided by companies to ex-employees on retirement changed with effect from 6 April 2006.
Prior to 6 April 2006, save for a small number of exceptions, private medical insurance provided to ex-employees on retirement was not a taxable benefit as the tax treatment was determined by the legislation that related to pensions and not to employment income (no tax charge under the benefits code can arise on the provision of medical insurance after retirement because a pension is not an employment).
The issue was whether the provision of medical insurance could be considered to be an “unapproved pension” or “non-approved pension”. Prior to 6 April 2006, legislation meant that non-cash benefits would not be considered a relevant benefit as it was not a cash payment. As such, for most pensioners, private medical insurance provided by their ex-employer was not taxable as pension income.
However, changes introduced by the Finance Act 2004 relating to the taxation of pensions mean that where an employer funds the cost of a medical insurance scheme, it can be treated as taxable pension income in the form of a relevant benefit as this definition now includes both non-cash and cash benefits.
However, the legislation provides that certain benefits are excluded and therefore are not affected by this change. These are:
- benefits in respect of ill-health or disablement of an employee during service;
- benefits in respect of the death by accident of an employee during service;
- benefits under a relevant life policy; and
- benefits of any description prescribed by the regulations made by HM Revenue & Customs
The first two only apply while the employee remains an employee and is therefore not relevant to a retiring employee. Medical insurance is not a life policy so cannot fall within that exemption. Finally, the regulations referred to in the final exemption have not yet been published, but it is understood that this will not include medical insurance.
It would seem therefore that if any medical insurance is provided to a pensioner by their ex-employer, this will give rise to a charge to income tax under the new pensions legislation.
If you would like further information on this issue, please contact Guy Abbiss, Tracey Horne or Colin Kendon.