»Ê¹ÚÌåÓýapp

Section 221 ITEPA 2003

Example (a): employees� and employer’s contributions fixed in advance

Employees and their employer contribute to a sick pay insurance scheme. Until 31 December 2020, the employees each pay £30 per month and the employer pays £20 per month for each employee. From 1 January 2021, the employees� contributions increase to £35 per month and the employer pays £25 per month per employee.

An employee falls sick on 1 October 2020, and is still ill and receiving sick pay on 1 October 2021.

From 1 October 2020, the amount of sick pay taxable as employment income is given by the formula:

Sick pay × (20 ÷ (20 + 30))

From 1 January 2021, the proportion of sick pay taxable as employment income is given by the formula:

Sick pay × (25 ÷ (25 + 35))

As the employee is still receiving sick pay after a whole year (on 1 October 2021) the part of the sick pay which is not taxable as employment income is potentially chargeable as Savings and Investment Income. Sections 735 � 743 ITTOIA 2005 exempt that part of the sick pay, but not the part taxable as employment income (see above).

Example (b): employees� or employer’s contribution variable

A sick pay club makes up its accounts to 31 May each year.

»Ê¹ÚÌåÓýapp employees each contribute 60p per week, and their employer pays whatever sum is needed to bring the total contributions up to £100,000 per year. Because the number of employees is variable, the relative amount of the employeesâ€� and employer’s contributions will not be known until the end of the year.

By 30 June 2020, the club calculates the employeesâ€� total contributions for the year ended 31 May 2020 to be £40,400, so the employer pays in £59,600. »Ê¹ÚÌåÓýapp proportion taxable as employment income is given by the formula:

Sick pay × (59,600 ÷ (59,600 + 40,400))

This proportion is applied from 1 July 2020.

By 30 June 2021, the club calculates the total contributions for the year ended 31 May 2021 as employees £35,700 and employer £64,300. »Ê¹ÚÌåÓýapp proportion taxable as employment income is recalculated as:

Sick pay × (64,300 ÷ (64,300 + 35,700))

This proportion takes effect from 1 July 2021.

On 1 October 2021 the club changes its rules and employees begin to contribute 40p per week, and their employer 70p per week per employee. From 1 October 2021 the proportion of sick pay taxable as employment income can be calculated in accordance with the rules in Example (a) above and is given by the formula:

Sick pay × (70 ÷ (70 + 40))

Using a Salary Sacrifice

For instances where an employer provides income protection policies through a salary sacrifice arrangement with their employees see guidance at EIM06470.