Providing private medical cover used to be the preserve of large corporates, but it is fast becoming a mainstream benefit for companies of every size. Our construction, engineering and tech clients tell us the same story: people value speed of treatment, and employers value fewer lost working days. This quick guide to health insurance explains how the benefit is taxed in the 2025/26 UK tax year, what it means for your team’s take-home pay and how you can keep the cost manageable.
It is worth remembering the scale of the problem health cover can help with. The Office for National Statistics estimates that 148.9 million working days were lost to sickness in 2024 – an average of 4.4 days per worker (ONS, 2024). Meanwhile, research shows that a third of UK employees rank private medical insurance as their most sought-after perk (The Global Recruiter, 2024). When skill shortages bite, offering a benefit employees actually want is a practical retention lever.
Yet health insurance is also a taxable benefit in kind (BIK). If you mis-report or under-budget you risk year-end surprises for both staff and the business. In the sections below we break down the rules, share real-world numbers and offer actionable steps so you can use this guide confidently, stay compliant and preserve cashflow.
Why private health cover is worth considering
- Reduced downtime: With NHS waiting lists still high, prompt private treatment can cut the 4.4-day average absence mentioned above – protecting project deadlines and client relationships.
- Staff demand: Private medical insurance tops the wishlist for 33% of employees (The Global Recruiter, 2024).
- Employer perception: Four out of five policy-holders (about 3.8 million people) access cover via work rather than buying individually, underlining how central employers are to provision.
When recruitment costs can exceed £7,500 per experienced hire, keeping valued staff healthy is often cheaper than replacing them.
The tax treatment at a glance
Private medical cover is a benefit in kind, so you must:
- Report the annual premium per employee on form P11D;
- Pay Class 1A National Insurance contributions at 15% of the benefit’s cash equivalent (HMRC, 2025/26);
- Give employees details so they can check their tax codes.
Example: A £600 annual premium attracts £90 Class 1A NIC (15% × £600). If ten employees are covered, budget £900.
From April 2027, HMRC will mandate payrolling of most benefits. Early adoption can smooth monthly cashflow – speak to us if you would like payroll software support.
What employees pay
Your team is taxed through PAYE on the value you report. For a basic-rate taxpayer the £600 example above means approximately £120 in income tax over the year (20% × £600). Higher-rate or additional-rate taxpayers pay proportionately more.
Make sure employees understand:
- Premiums are set for the scheme as a whole – age and postcode can affect cost allocations
- Claim history may influence next year’s premiums
- Optional upgrades (for example, dental add-ons) usually sit outside the core scheme and are paid by the employee post-tax
Clear communication avoids unpleasant surprises at self-assessment time.
Using our guide to health insurance for accurate tax calculations
Follow these checkpoints:
- Policy schedule review: Confirm the insurer’s schedule lists every insured individual and the employer’s total premium.
- Apportionment method: If the insurer does not split premiums by employee you must adopt a “just and reasonable” allocation.
- Mid-year joiners and leavers: Pro-rate the premium to days of cover provided.
- Salary sacrifice viability: Private medical cover is excluded from Optional Remuneration Arrangements, so salary sacrifice will not reduce the taxable benefit.
Keeping the premiums affordable
Controlling cost is the difference between a strategic benefit and a burden:
- Scheme design options: Guided care: restricts hospital lists to reduce premiums; Six-week option: defers elective treatment to the NHS if the wait is shorter than six weeks.
- Policy excesses: Require staff to pay the first £100-£250 of claims.
- Cashflow tactics: Monthly direct debit beats annual lump-sum outlay; ring-fencing NIC in a separate ledger account stops year-end shocks.
- Wellbeing add-ons: Early intervention services cost little but can cut absence – physiotherapy helplines for manual workers are popular in construction.
Compliance checklist for 2025/26
- Payroll software: Ensure it can handle payrolling of benefits if you adopt it early.
- Annual P11Ds: File by 6 July 2026; pay Class 1A NIC by 22 July if electronic.
- Employee statements: Provide by 6 July so staff can check their 2025/26 tax codes.
- Record-keeping: Keep invoices, premium splits and explanatory notes for six years.
- Professional review: Quarterly reviews: catch staff changes; Year-end review: reconcile benefit totals to insurer statements.
Our team can act as your outsourced payroll bureau or provide an annual compliance healthcheck – see our payroll and benefits service for details.
Moving forward with confidence
Health cover is no longer a luxury: it is a practical tool for productivity, talent retention and risk management. By applying the steps in this guide to health insurance, you will:
- Forecast premiums accurately, factoring in Class 1A NIC so there are no nasty surprises at year-end.
- Avoid HMRC penalties by recording and reporting benefits correctly first time.
- Strengthen your employee value proposition – a vital differentiator when skilled site supervisors, engineers or developers can move for just a few pounds more a day.
- Protect deadlines and client relationships by reducing avoidable downtime on site or in the office.
We work with construction SMEs, engineering consultancies and tech-driven businesses every day, so we understand the pressures of project-based cashflow and the regulatory environment you operate in. Whether you are costing a brand-new scheme, sense-checking P11Ds or looking to shift benefits into payroll ahead of the 2027 mandate, our specialist team is ready to help.
Take the next step: get in touch with us. Together we can turn private medical cover into a strategic advantage for your people and your profit.