Tax on Sick Pay: What You Need to Know

Navigating the world of work often brings up questions about earnings, and one common query revolves around sick pay. Many individuals wonder whether the income received while off sick is subject to taxation. The short answer is generally yes, but the specifics can depend on the type of sick pay you receive and who is providing it. This article aims to demystify the process of taxing sick leave in the UK, providing a clear and comprehensive overview for employees and employers alike.

Understanding Different Types of Sick Pay

Before delving into the tax implications, it's crucial to understand the different forms sick pay can take in the UK. These generally fall into two main categories:

• Statutory Sick Pay (SSP): This is the minimum financial support the government requires employers to provide to eligible employees who are too ill to work. SSP is paid for by the employer but is funded by the government through the tax system.
• Occupational Sick Pay: Many employers offer more generous sick pay schemes as part of their employment contracts. This is known as occupational or company sick pay and is often based on length of service, with terms varying significantly between organisations.

Is Statutory Sick Pay (SSP) Taxable?

Yes, Statutory Sick Pay (SSP) is considered taxable income. While it might feel like a benefit, it is treated as earnings by HM Revenue and Customs (HMRC). This means that income tax and National Insurance contributions (NICs) will be deducted from SSP in the same way they are from your regular wages.

The tax is usually deducted at source by your employer through the Pay As You Earn (PAYE) system. This means that when your employer processes your SSP, they will apply the standard tax codes and rates, reducing the amount you receive in your bank account.

It's important to note that SSP is paid at a set rate, and if your total income, including SSP, falls within taxable thresholds, you will be liable for income tax. The current rate for SSP is a flat rate, and you must meet certain eligibility criteria to receive it, including earning an average of at least £123 per week (as of the time of writing) and being classed as an employee.

Tax on Occupational Sick Pay

Occupational sick pay, being more generous than SSP, is also subject to income tax and National Insurance contributions. Since it is paid by your employer, it is treated as earned income and is therefore taxed through the PAYE system.

The amount of occupational sick pay can vary widely. Some schemes might pay your full salary for a certain period, while others might offer a percentage of your salary. Regardless of the amount, as long as it constitutes payment for your employment (even when you are unable to perform your duties due to illness), it will be subject to the standard tax deductions.

Employers are responsible for correctly reporting and deducting tax on all payments made to employees, including occupational sick pay. This ensures that the tax is collected efficiently and correctly.

How Tax is Calculated on Sick Pay

The calculation of tax on sick pay is integrated into the PAYE system. When you receive SSP or occupational sick pay, your employer will use your tax code to determine the amount of tax to deduct.

Your tax code reflects your personal tax-free allowance. If you are only receiving sick pay and no other income, and your total earnings for the tax year remain below your personal allowance, you may not have to pay any income tax. However, if your sick pay, combined with any other income you receive, pushes you over the tax-free threshold, then tax will be applied.

National Insurance contributions are also typically deducted from sick pay. The rate of NICs depends on your earnings. Similar to income tax, if your earnings from sick pay are below the National Insurance threshold, you may not have to pay NICs.

Impact on Tax Code

Generally, receiving sick pay does not require an immediate change to your tax code. The PAYE system is designed to handle fluctuations in income, including periods of sick leave. Your employer will continue to operate PAYE based on the information they have, including your tax code and the payments they make.

However, if your period of sick leave is extended and significantly impacts your annual income, it might be worth checking if your tax code is still appropriate. In cases where your income is substantially reduced for an extended period, you might find you have overpaid tax. You can contact HMRC to review your tax code if you believe this is the case. This is particularly relevant if you have multiple sources of income or complex tax affairs.

What About Benefits Received While Sick?

Sometimes, alongside sick pay, employees might receive other benefits from their employer, such as private medical insurance or payments made to cover certain expenses. The taxability of these benefits depends on their nature and whether they are considered a benefit in kind.

For instance, if an employer continues to pay for your private health insurance while you are on sick leave, this benefit may still be taxable as a benefit in kind. However, certain expenses incurred due to illness, such as physiotherapy costs, might be tax-exempt if they are paid directly by the employer and are considered a genuine medical treatment to help you return to work.

It is always advisable to clarify the tax status of any benefits received with your employer or HMRC.

Record Keeping for Sick Pay

As an employee, it's good practice to keep records of all payments received while on sick leave. This includes payslips that detail the SSP or occupational sick pay received, as well as any deductions made. These records can be invaluable if you need to query a tax calculation or make a claim for tax relief in the future.

Employers are legally obligated to provide payslips that clearly show how your pay has been calculated, including any deductions for tax and National Insurance. Ensure you receive and retain these documents.

Tax Implications for Self-Employed Individuals

The situation for self-employed individuals is different. If you are self-employed and unable to work due to illness, you will not receive SSP. Instead, you may be eligible for New Style Employment and Support Allowance (ESA), provided you have paid sufficient National Insurance contributions. ESA is a taxable benefit.

If you have taken out income protection insurance, any payments received from such policies are generally taxable. However, the tax treatment can depend on whether you paid the premiums yourself or if they were paid by your business.

Self-employed individuals should ensure they understand their tax obligations regarding any income or benefits received during periods of illness. Consulting with an accountant or tax advisor is recommended for personalised guidance.

When Might You NOT Pay Tax on Sick Leave?

While most sick pay is taxable, there are specific circumstances where you might not pay tax on payments received during illness:

• Income below the Personal Allowance: If your total income for the tax year, including any sick pay, falls below the standard personal tax-free allowance, you will not pay income tax on it.
• Certain Approved Schemes: In rare cases, specific government-approved schemes or charitable payments made to support individuals during illness might be tax-exempt. However, this is not typical for standard sick pay arrangements.
• Specific Medical Expenses Paid by Employer: As mentioned earlier, some direct payments by employers for specific medical treatments intended to help an employee return to work may be tax-exempt.

It is crucial to distinguish these from regular sick pay, which is almost always taxable.

Key Takeaways: Tax on Sick Pay

To summarise, the core points to remember regarding tax on sick leave in the UK are:

• Statutory Sick Pay (SSP) is taxable.
• Occupational (company) sick pay is also taxable.
• Tax and National Insurance are typically deducted at source via the PAYE system.
• Your personal tax code determines the amount of income tax deducted.
• Keep good records of all sick pay received and deductions made.
• Self-employed individuals have different rules and may be eligible for taxable benefits like ESA.

Frequently Asked Questions

Q1: Do I pay tax on the first few days of sickness?

A1: If you receive payment for the first few days of sickness (often called 'waiting days' for SSP), this payment is generally treated as income and is subject to tax and National Insurance in the same way as regular sick pay.

Q2: What if my employer doesn't deduct tax from my sick pay?

A2: If your employer fails to deduct tax and National Insurance correctly, you may owe money to HMRC at the end of the tax year. It is your responsibility to ensure your tax affairs are in order. You should speak to your employer immediately to rectify the situation.

Q3: Can I claim tax relief if I'm on long-term sick leave?

A3: If your income significantly drops due to long-term sick leave, your tax code might need adjustment. You can contact HMRC to see if you are eligible for a tax code change, which could result in a refund if you have overpaid tax. Keeping detailed records of your income and expenses is vital.

Q4: Is sick pay from a private insurance policy taxable?

A4: The taxability of private insurance policies depends on the specific policy terms and how the premiums were paid. If you paid the premiums yourself, the benefits received are usually tax-free. If the premiums were paid by your employer, the benefits are typically taxable.

Q5: What happens if I receive sick pay and also work part-time for another employer?

A5: Both sources of income, including sick pay from one employer and wages from another, will be considered when calculating your overall tax liability. Ensure both employers have your correct tax code and inform HMRC of all your employment details.

Understanding how sick pay is taxed is an essential part of managing your personal finances. While it might seem like a deduction from your earnings, the system is in place to ensure fair taxation across all income types. By staying informed and keeping accurate records, you can confidently navigate these financial aspects of illness.

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