The Employer Paid the Employee's Annual Life Insurance: When to Pay Personal Income Tax and Military Levy

Employer payment of employee insurance has long been used as a social tool for motivating personnel. However, in practice, such payments often raise questions regarding taxation and tax reporting.

"Judicial-Legal Newspaper" examined whether personal income tax and military levy should be accrued if an enterprise pays, at its own expense, insurance premiums to an insurance company under a voluntary life insurance contract for employees for only one year.

Practical example

An enterprise contacted the State Tax Service (STS) after concluding a one-year voluntary accident insurance contract with an insurance company for its employees. The employer pays all insurance premiums at its own expense. As such a contract does not meet the criteria for long-term life insurance, the enterprise sought clarification on three questions: whether the employee has taxable income, which income code should be indicated in Appendix 4DF, and what other tax considerations the employer should take into account.

The STS noted that, in the described situation, the contract was concluded for only one year and therefore does not qualify as long-term life insurance, for which the Tax Code provides separate taxation rules. The mere fact that the employer pays insurance premiums for the employee does not automatically exempt them from taxes. Firstly, it is necessary to assess whether such a payment falls under the list of incomes excluded from general taxable income, as defined by Article 165 of the Tax Code.

Why taxable income arises

The Tax Service reminded that, according to subparagraph 163.1.1 of Article 163 of the Tax Code, an individual's total monthly or annual taxable income is the object of taxation. The list of incomes that are not taxed is contained in Article 165 of the Tax Code of Ukraine.

If the payment does not fall under these exceptions, general taxation rules apply. At the same time, subparagraph 164.2.16 of paragraph 164.2 of Article 164 of the Tax Code directly includes insurance payments (premiums) in an individual's taxable income. The STS refers to this norm, concluding that insurance payments made by the employer under a one-year voluntary life insurance contract for employees are included in their taxable income.

Which Taxes Must Be Paid

As these insurance premiums are recognised as an employee's taxable income, the employer, acting as a tax agent, must comply with the requirements of Article 168 of the Tax Code. This means the following must be withheld from the amount of such income:

• 18% personal income tax in accordance with paragraph 167.1 of Article 167 of the Tax Code;

• 5% military levy in accordance with subparagraph 1.3 of paragraph 16¹ of subsection 10 of section XX of the Tax Code.

Therefore, the STS confirmed that in the case of a short-term voluntary life insurance contract, no special tax benefits apply; insurance premiums are taxed on a general basis.

Which Income Code to Indicate in Appendix 4DF

The enterprise paid particular attention to completing tax reporting. The inquiry noted that in practice there were doubts as to whether to use income code 124, 126, or another. The STS provided a clear answer. The tax authorities referred to paragraph 4 of section IV of the Procedure for completing and submitting the Tax Calculation, approved by Ministry of Finance Order No. 4, as well as to the Directory of income codes for individuals. The Directory states that insurance premiums paid by a resident employer for an employee are reported in Appendix 4DF under income code "125".

Therefore, the STS did not confirm the use of income codes 124 or 126 in this situation.

What This Means for Employers

The STS clarification effectively resolves one of the common practical problems when arranging voluntary employee insurance. If the employer pays insurance premiums for an employee under an annual voluntary life insurance contract, such amounts:

• are included in the employee's taxable income;

• are subject to personal income tax at 18% and military levy at 5%;

• are reported in Appendix 4DF under income code "125".

At the same time, the STS separately reminded that, according to paragraph 52.2 of Article 52 of the Tax Code, an individual tax consultation is specific and can be applied exclusively by the taxpayer to whom it was provided. However, the legal position presented in the consultation can serve as a guideline for other employers when fulfilling similar tax obligations.

Why Insurance Premiums Are Considered Employee Income

Although the employer transfers insurance payments directly to the insurance company and not to the employee, this does not change their tax nature. The Tax Code assumes that an individual receives economic benefit at the employer's expense, as their right to insurance coverage is ensured by the enterprise's funds. Therefore, such amounts are considered employee income and are subject to taxation unless a special exemption is established.

At the same time, the STS noted that in this case, the contract does not meet the requirements of long-term life insurance, as it is concluded for only one year. Therefore, the legislation does not provide grounds for applying tax benefits.

The individual tax consultation of the STS effectively highlighted the taxation of short-term voluntary life insurance for employees. If the employer pays insurance premiums under a contract concluded for one year, such amounts are recognised as the employee's taxable income, from which personal income tax and military levy must be withheld. In addition, the tax service confirmed that such payments should be reported in Appendix 4DF under income code "125", which is practically important for correct tax reporting.

At the same time, the STS reminded that, according to paragraph 52.2 of Article 52 of the Tax Code of Ukraine, an individual tax consultation is individual in nature and can be used exclusively by the taxpayer to whom it was provided. However, the legal position set forth therein reflects the official approach of the tax authority to the application of legislative norms and can serve as a useful guideline for other employers in similar legal relations.

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