IPTM6125 | Sickness disability and unemployment insurance: tax treatment: employer's schemes: where employment ends for health reasons: ITTOIA05/S741

An employee may leave employment because of a risk that was insured against under an employer’s policy, for example retirement on the grounds of ill-health.

As the employment has now ceased, any part of the payments received which do not qualify for the exemption will be taxed as an annual payment and not as employment income.

Benefits might continue to be paid to the person under a separate policy linked to the employer’s policy and issued to replace it.

If so, the policies are treated as one for the purposes of the exemption. The new policy must have been entered into in accordance with provisions contained in the employer’s policy, and rights under the employer’s policy must have ceased to apply. But if these conditions are met the effect is that the rules at IPTM6120 are unchanged by the employee’s departure.