This will depend on the purpose of the plan, their relationship with the employee and the type of cover involved.
If they take out Life Cover, Critical Illness Cover or Life or Critical Illness Cover, they will normally only pay tax on any claim if the plan qualifies for tax relief on the premiums. To get relief from tax they must meet all of the following conditions:
The plan must be to cover loss of profits only
The relationship between the client and the person covered must be employer and employee
The cover must be short term
The amount of cover must be reasonable.
This means that if the plan is for example to cover the repayment of a loan rather than a loss of profit, they are unlikely to get relief. If the person covered is a significant shareholder (generally meaning they or members of their family own more than 5% of the business) they are unlikely to get relief.
If the cover is not short term, which normally means a term of 5 years or less, they are unlikely to get relief. If the amount of cover is not related to the amount of profit they will lose if this employee is no longer able to work for them, they are unlikely to get relief. If they do not get relief they will not normally be taxed on any amount they receive from a claim. However they should speak to their local inspector of taxes setting out the full details of the plan and ask them to confirm how they will treat the plan for tax purposes.
If the plan includes Income Protection this is taxed differently in the event of a claim. If we pay a claim, the amount your client receives will be treated as a trading receipt and they must pay tax on it. However, if they pay this amount to their employee to continue their salary they can treat this as an expense for tax purposes so the receipt and expense cancel each other out. They will however have to continue to pay employer's National Insurance and to deduct income tax and employee's National Insurance from the amount they pay the person covered.