Tony Granger examines the impact on a business and on working directors themselves if they become seriously ill or injured so that they cannot work.
For the business, an incapacitated working director will still have salary and employee benefit costs, whilst not contributing to revenues. The question then arises – for how long can the business support the director financially?
For wealthier businesses, this may not be an issue. However, many businesses will need to replace the worker. If the director is a key person, without whom the business may fail, serious illness or incapacity can be catastrophic. There are a number of insurance policies and income protection schemes to consider.
What the state pays
If you can't work because you are sick or disabled, whether temporarily or permanently, you might be able to claim statutory sick pay (SSP) or employment and support allowance (ESA).
Usually, SSP is paid for the first 28 weeks of sickness if you work for an employer. The weekly rate for SSP is £94.25 (2019/20) for up to 28 weeks. It is paid for the days an employee normally works - called 'qualifying days' in the same way as wages.
The new style ESA pays up to £57.90 under age 25, and up to £73.10 per week if over age 25 (in 2019/20). This can rise to £111.65 per week if in the support group. Contribution-based ESA is based on National Insurance contributions and is taxable. It may be reduced if you have a private pension or you're claiming other benefits. Income-related ESA is not taxable.
You cannot have SSP and ESA at the same time – the claim is first for SSP for 28 weeks then ESA is applied for. At best then the State will cover lost income at a very low level – SSP at £368.20 per month for six months and ESA at £292.40 per month thereafter. Income-related ESA is paid for 12 months; support group contribution ESA has no limit.
The employer
A generous employer can continue to pay the director, but this may well be limited. Employers may have an occupational sickness or income protection scheme (PHI) in place, which they fund. Benefits are usually up to (say) 75% maximum of salary less any state benefits received, such as SSP.
The employer may provide the funds for sick pay directly or through a trust or insurance policy. The sums paid to employees are taxable as earnings (within ITEPA 2003, ss 62 or 221). The sick pay is taxable whether it is paid to the employee or a member of their family or household. Premiums paid are deductible to the employer.
Director making own provision
Assume a male non-smoker born 1 March 1969 (age 50), with annual earned income of £50,000, with maximum income benefit payable to age 65. Premiums are guaranteed and the benefit is level.
If paid after 13 weeks, the monthly premium for £2,500 p.m. benefit is £98.66; if deferred to 26 weeks, the premium is £88.04 p.m. (quote as at 26.3.2019).
If the employer provides the policy and you pay the premiums, the benefits are taxable in your hands. Where you provide the policy and pay the premiums the benefits are tax-free.
Other protections
Protections can also be more specific, e.g. critical illness cover paying a lump sum, or income on a diagnosis of a dreaded disease, such as cancer. Medical aid schemes can pay for medical costs.
Practical Tip:
Consider the sickness policy of your company. Group scheme PHI protects the work force’s income; ‘Key person’ PHI protects the business’s income and cash flows. Individual PHI protects the individual’s income.
