Is income protection insurance tax deductible?
What is income protection insurance?
If you are an Australian resident who earns wages or a salary, you have the option to take out income protection insurance, which is designed to safeguard your income in case you get sick or injured and can’t work temporarily. You will receive a monthly payment that reflects a portion of your regular income and allows you to carry on paying your bills and maintaining your and your family’s quality of life, while you recover and get ready to return to work. Because income protection insurance premiums are related to your work, they could be tax deductible (depending on the channel the policy is purchased through), meaning they could help reduce your total taxable income. If you have questions about claiming a tax deduction for your premiums, you should speak to your financial advisor.
Can you claim tax on income protection insurance?
You may be able to claim the cost of your income protection insurance premiums against any loss of income (salary or wages), according to the Australian Taxation Office (ATO).
Income protection insurance policies taken out with an insurance company, a financial adviser or broker and not through your superannuation fund, are generally tax deductible, according to Australian Government’s Moneysmart website.
What’s the criteria for income protection insurance to be tax deductible?
Here’s a list of some criteria for income protection premiums to qualify for a tax deduction:
- the policy is held by you (the policy holder);
- the policy is issued by an Australian-licensed insurer;
- the policy provides protection for your income;
- only the premiums you pay to protect your income (salary and wages) are deductible. If the policy covers any other types of insurance, e.g. total and permanent disability or life, that portion of premium is not deductible;
- you, as the policy holder, must be earning an income (salary or wage) – employee or self-employed; and
- the premiums must be paid directly by you as the policy holder, and not through your superannuation.
It is important to note that the ATO has strict guidelines around claiming a tax deduction for income protection insurance. If you are unsure whether you are eligible to claim a deduction, you should speak with a professional.
How does tax deduction for income protection insurance work?
The cost of having an income protection policy (the premiums) may be able to be deducted from your taxable income as a work-related expense.
If you receive any benefit payment under an income protection policy to replace your income, you must include it in your upcoming tax return as income so it can be assessed by the ATO.
How is a tax deduction calculated?
It is important to note that the amount of tax deduction you can claim for the cost of your income protection insurance premiums will depend on your unique situation. However, in some cases, you may be able to claim the full cost of your income protection insurance premiums as a tax deduction.
If your income protection insurance policy is bundled with other types of cover, such as life insurance or total and permanent disability insurance, you can only claim a deduction for the portion of your premiums that contributes towards your income protection insurance.
The amount of your tax deduction will depend on various factors, including your taxable income, the cost of your premiums, and your marginal tax rate.
As an example of how tax deduction is calculated, if paying an annual premium of $1,000 for income protection insurance outside of super, the premium for the policy may be tax deductible at the marginal tax rate. See tables below for the 2024 and 2023 financial years:
2024/2025
From 1 July 2024:
| Taxable income | Annual premium | Marginal tax rate 2024/25 | Tax deduction |
|---|---|---|---|
| $0-$18,200 | $1,000 | Nil | $0 |
| $18,201-$45,000 | $1,000 | 16c for each $1 over $18,200 | $160 |
| $45,001-$135,000 | $1,000 | 30c for each $1 over $45,000 | $300 |
| $135,001-$190,000 | $1,000 | 37c for each $1 over $135,000 | $370 |
| Over $190,000 | $1,000 | 45c for each $1 over $190,000 | $450 |
2023/2024
| Taxable income | Annual premium | Marginal tax rate 2023/24 | Tax deduction |
|---|---|---|---|
| $0-18,200 | $1,000 | Nil | $0 |
| $18,201-$45,000 | $1,000 | 19c for each $1 over $18,200 | $190 |
| $45,001-$120,000 | $1,000 | 32.5c for each $1 over $45,000 | $325 |
| $120,001-$180,000 | $1,000 | 37c for each $1 over $120,000 | $370 |
| $180,001 and over | $1,000 | 45c for each $1 over $180,000 | $450 |
Income and deductions are for illustration purposes only and does not include any other deductions or figures such as the Medicare levy.
If you have questions about claiming a tax deduction for your income protection insurance, you should speak to a professional.
How can I claim income protection insurance on my tax return?
If you are eligible to claim the tax deduction, you can do so by:
- Completing your tax return and declaring your income protection premiums as a deduction.
- Providing a copy of your income protection insurance policy as part of your tax return.
Be sure to keep records of your income protection insurance premiums, including the date you paid any premiums, the amount paid, and the name of the insurer, in case the ATO asks for evidence of your premiums.
Seek independent taxation advice
The ATO has strict guidelines for making a tax deduction claim for income protection insurance premiums. In order to confirm whether you can claim a tax deduction for your income protection insurance, you should speak to a tax agent, accountant, or your financial advisor to get tailored and accurate information specific to your individual circumstances.