Health cash plans for employees: tax and NI

A health cash plan paid for by an employer is a taxable benefit in kind, and the taxable amount is what the employer pays for the cover, less anything the employee contributes. The National Insurance depends on whose name is on the contract: if the employer holds the policy it pays Class 1A, but if the employee holds it and the employer pays the premiums, the cost goes through payroll as Class 1 earnings. Reimbursing the employee or paying a cash allowance instead makes it ordinary pay.

How does HMRC treat a health cash plan?

A health cash plan is an insurance policy that pays cash back towards routine health costs, typically dental check ups, glasses, physiotherapy and similar treatment, up to annual limits. HMRC has no separate guidance for cash plans. Because the plan insures against the cost of medical and dental treatment, it falls within the GOV.UK rules for medical or dental treatment and insurance, and within the benefits code charge described in the Employment Income Manual.

EIM21762 says a director or employee is chargeable where the employer contributes to a medical insurance scheme and the employee, or members of their family or household, are covered. The charge is on the premium paid for the employee and their family, less any part the employee makes good. GOV.UK confirms that the value to use is the cost to the employer of providing the insurance. The charge is on that cost, not on the value of claims the employee makes during the year.

A cash plan is a different product from private medical insurance, which pays for hospital treatment, but the tax mechanics are the same. See private medical insurance as a benefit in kind for the comparison.

Why does it make a difference who holds the contract?

The income tax result is the same in each case, but the National Insurance and the reporting route are not. GOV.UK sets out three situations:

Arrangement	Income tax	National Insurance
Employer arranges the plan and pays the provider	Report on P11D	Class 1A on the cost
Employee arranges the plan, employer pays the provider	Report on P11D (no PAYE tax)	Class 1 through payroll
Employer reimburses the employee, or pays a cash allowance or extra salary	PAYE through payroll	Class 1 through payroll

The reason is the pecuniary liability principle. The National Insurance Manual at NIM02270 explains that if the employer enters into the contract and pays, the debt is the employer’s own, so there are no Class 1 earnings, only a Class 1A benefit. If the employee enters into the contract and the employer pays, the employer is meeting the employee’s debt, and the payment is Class 1 earnings. HMRC stresses that you must look at who actually contracted with the provider; the name on the invoice is not enough. The same principle is explained more generally in employer paying an employee’s personal bills.

In practice, a company scheme set up by the employer with the provider falls in the first row. An employee who already has a personal plan and asks the employer to take over the direct debit falls in the second.

What does each route cost?

Illustration only. A plan costs £240 a year for one basic rate employee. Rates are for 2026 to 2027: basic rate tax 20%, employee Class 1 at 8% on earnings between the primary threshold and the upper earnings limit, and employer Class 1 and Class 1A both at 15%.

Route	Employee tax	Employee NI	Employer NI
Employer holds the plan	£48	Nil	£36 Class 1A
Employee holds the plan, employer pays provider	£48	£19.20	£36 Class 1
Employer reimburses the employee	£48	£19.20	£36 Class 1

Only the first route avoids employee National Insurance, which is why most employers set up cash plans as a company scheme. Class 1A is also paid once a year rather than each pay period; see Class 1A National Insurance.

What if the plan covers the employee’s family?

A benefit provided for members of an employee’s family or household by reason of the employment is charged on the employee (EIM20504). If the plan covers a partner or children, the premium for their cover is part of the employee’s taxable benefit. For a group scheme, EIM21763 says the policy terms will usually show the amount for each employee or category of employee; if not, HMRC can accept any reasonable apportionment adopted by the employer and generally accepted by employees.

A common arrangement is for the employer to pay for the employee and the employee to pay extra, through a deduction from net pay, to add family members. The employee’s own payment is made good and is deducted from the taxable amount, provided it is actually paid.

Are any health benefits exempt?

Several specific health benefits are exempt from tax and National Insurance, each with its own conditions. GOV.UK lists one health screening and one medical check up a year, eye tests and glasses required for screen work, flu vaccinations, treatment abroad for employees working overseas, insurance or treatment limited to work related injuries or diseases, and up to £500 of recommended treatment to help an employee return to work. See exempt health benefits for the detail.

These exemptions cover particular items the employer provides or pays for. A premium for a general cash plan that pays out towards everyday dental, optical and therapy costs is not one of those items, so it remains taxable even if the employee uses part of it for an eye test.

Does salary sacrifice change the answer?

Yes, and usually for the worse. GOV.UK says the exemptions above do not apply where the benefit is provided through salary sacrifice, and that if the cost of the treatment or insurance is less than the salary given up, the employer reports the salary amount instead. A cash plan offered through a flexible benefits platform in exchange for salary is therefore taxed on the higher of the premium and the pay forgone. See salary sacrifice schemes.

How is it reported, and what changes in 2027?

HMRC’s guide to completing P11D says premiums the employer pays for insurance against treatment it has arranged go in the private medical treatment or insurance section. Where the employee arranged the cover and the employer paid, the amount goes in the payments made on behalf of employee section instead. Employers who have registered to payroll benefits report them through payroll rather than on P11D; see payrolling benefits in kind.

HMRC has confirmed that mandatory payrolling of benefits in kind starts in April 2027, with employment related loans and living accommodation left optional. Employers offering a cash plan should check that their payroll software and provider data flows are ready before 6 April 2027.

What mistakes come up most often?

• Assuming the plan is tax free because the individual claims are small. The charge is on the premium.
• Paying an employee’s existing personal plan and returning Class 1A instead of Class 1.
• Leaving family cover out of the taxable amount.
• Ignoring employee contributions that should reduce the benefit, or counting contributions that were never actually collected.
• Using salary sacrifice and reporting the premium when the salary given up is higher.

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Related Accountapedia entries

• Health and medical services: VAT exemption
• US employee stock purchase plans for UK staff
• Share Incentive Plans (SIP)
• Monthly fee payment plans for clients
• Serious ill health lump sums

Related cover: Employers liability insurance: the legal requirements and Employers liability vs public liability.

Sources

• GOV.UK: Expenses and benefits medical treatment
• GOV.UK: Manual page EIM21762
• GOV.UK: Manual page EIM21763
• GOV.UK: Manual page EIM20504
• GOV.UK: Manual page NIM02270
• GOV.UK: Rates and thresholds for employers 2026 to 2027
• GOV.UK: How to complete forms p11d and p11db
• GOV.UK: Getting ready for mandatory payrolling of benefits in kind

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.