The impending hike in insurance premium tax makes healthcare trusts considerably more attractive. But, asks Sam Barrett, is the increase enough to kick companies into action?
The latest increase in insurance premium tax is scheduled for October – taking the rate to 10 per cent from just 6 per cent a year ago – and many people think more rises will follow. As this tax pushes up the cost of providing medical insurance, the search for tax-efficient ways to deliver healthcare benefits has become much more pressing.
The numbers are simple for employers to grasp: a company paying a £500,000 premium for its medical insurance last October would have faced an IPT charge of £30,000 on renewal; this October, assuming a 10 per cent increase in the underlying premium to take account of medical inflation and claims experience, the tax charge will almost double to £55,000, raising the total cost from £530,000 last year to £605,000 this year.
Slashing the tax bill
Step forward healthcare trusts. Unlike medical insurance, where IPT is applied to the whole premium, with a trust arrangement the employer sets aside a claims fund to cover employees’ healthcare needs. As this is not insurance, it is not subject to IPT; instead the employer pays VAT at 20 per cent on any administration or trustee fee plus IPT on any stop-loss insurance. This means the overall tax charge is much smaller than if the employer had gone down the full insurance route (see box).
For example, on a £1m claims fund an employer would face an IPT bill of £120,000 once the insurer’s costs were included. In contrast, a healthcare trust would bring tax charges of £25,000 – almost 80 per cent less than the fully insured arrangement.
Given the potential savings, trust providers are already seeing increased interest from employers keen to cut their tax bills.
“It’s been a bit of an incentive for employers to look at their healthcare benefits, especially because the additional tax spend can equate to the cost of an employee,” says WPA Protocol managing director Rachel Riley.
“It’s not been a mad dash to trusts, partly because there is a lead time to implement a new arrangement. But companies have brought forward the comprehensive healthcare reviews they normally conduct every three years or so to consider other options.”
Aon Employee Benefits principal Rachel Western tells a similar story. She says: “Few clients would contemplate switching medical insurance for savings of less than 10 per cent but, now that the IPT has increased, it’s made it worth considering. We’ve seen a lot more interest in getting trust terms.”
As this renewed interest in healthcare trusts shows, there is still plenty of potential for this market. However, for some employers the leap from an insured scheme to a trust arrangement is too daunting.
Consequently, providers are exploring ways to deliver the tax savings associated with a trust without the hassle that comes with setting up and running one.
For some, a master trust offers a solution. Axa PPP Healthcare director, health consulting Elliott Hurst explains: “These benefit from the same tax-saving mechanics as a full trust but, as we act as the trustees, there’s much less work for the employer. We’ve seen a lot of interest from employers concerned about the IPT increase.”
Having the provider take on the role of trustee also makes it much easier to set up a master trust. Hurst says it need take only a couple of months to switch from insurance.
“We recommend that an employer gets tax and legal advice when moving to a master trust and, if they do this when we issue renewal terms, the new arrangement can be in place when the insurance lapses.”
Although master trusts are growing in popularity, Aviva and WPA also report renewed interest in their variations on the trust arrangement. These schemes –called Corporate Excess and Corporate Deductible respectively – enable a company to use a large deductible to reduce its tax bill.
To do this a notional claims fund is calculated, with a percentage of it set as the deductible and used to pay claims. This deductible is free of IPT and companies can choose their preferred percentage of the notional claims fund, with smaller groups or those with less certain claims profiles tending to opt for lower deductibles.
On top of this, the company pays the balance between the deductible and the notional claims fund, together with an administration fee and insurance charge to the insurer. This element is subject to IPT but, due to the figures involved, will be a much smaller amount than if the employer had opted for a medical insurance scheme (see box).
Possibly because the Corporate Excess scheme is easier to set up than a full trust, companies have switched to it since the IPT started rising, according to Aviva UK Health senior proposition development manager Kevin Murdoch.
“We’d still want a group of at least 500 members but it’s a bit simpler than a full-blown trust and it can help a company control costs over the long term,” he says.
Although the IPT increase will prompt more employers to move to these arrangements, a recent notice from HMRC should also help to drive sales and development in this area. There has been some cynicism about whether the Corporate Deductible model is effective from a tax perspective but HMRC’s Notice IPT1: Insurance Premium Tax recognises it as a viable way to fund healthcare benefits.
It states: “If an insured party negotiates a reduced premium because a policy involves a deductible (whereby a proportion of the insured loss is borne by the policyholder), the IPT is due only on the reduced premium.”
While the numbers switching to trust arrangements are gathering momentum, some are already looking ahead to the next development in this market. Riley thinks this is likely to come in the form of more integrated healthcare strategies, with employers using a trust arrangement to combine all their benefits and deliver them more tax-efficiently.
Certainly trusts have plenty of flexibility to encompass a broader range of healthcare benefits than is traditionally part of a medical insurance scheme. The HMRC rules, which form part of the Income Tax (Earnings and Pensions) Act 2003, state that medical treatment constitutes “all procedures for diagnosing or treating any physical or mental illness, infirmity or defect”.
Unfortunately, however, although this flexibility exists, many employers simply replicate the benefits offered under a medical insurance policy.
“There doesn’t tend to be a huge break from the benefits found on a traditional medical insurance scheme but we’d be happy to consider health options such as dental, optical and baby bonuses,” says Murdoch. “We’re always looking at how to bring new things to the market to support employers as the NHS changes.”
Some are starting to see more innovation across the trusts they administer. For example, Healix Health Services sales director Richard Saunders says many of the trusts the firm has taken on this year have opted for a degree of triage to complement the benefits on offer.
“An employee can call one of our nurses and get help navigating the different healthcare benefits available,” he says. “This can ensure they get the most appropriate treatment quickly, reducing absence and improving productivity.”
Riley too has seen encouraging signs that a more integrated approach will become more commonplace. WPA recently consulted a pharmaceutical company about how it could use its healthcare budget more effectively.
“It wants to bring together all its health and wellbeing benefits to deliver a more tailored approach,” says Riley. “This will drive savings while giving employees more appropriate benefits.
“Now that pensions auto-enrolment is out of the way, employers are keen to explore how to get more value from their healthcare benefits.”
But to get to this position there are obstacles to overcome. For Western, the key issue is the fact that most companies have a mix of providers. “Bringing all these benefits together works only for large companies with their own healthcare trust setup,” she says. “Otherwise it can be very difficult to integrate benefits.”
Pressure may come from the Government to address this. With initiatives such as Fit for Work, it has already signalled that employers should play a bigger role in safeguarding employees’ health.
Its intervention may encourage more innovation as well as remove some of the barriers to seamless interaction between different healthcare benefits.
Riley agrees. “An integrated healthcare strategy is emerging but we need to stop thinking about the different products in silos,” she says.
“It requires imagination and courage to realise the benefits that a more integrated approach could bring.”