Is the cost of income protection tax deductible?
Premiums paid for income protection policies are one of the few remaining tax deductions able to be claimed by employees.
According to the Australian Taxation Office, premiums for Income Protection are tax deductible to individuals where the premium is an expense incurred to protect against the loss of income.
This is unlike Life, TPD and Trauma insurance premiums, which are not personally tax deductible.
When the tax refund received for income protection policies is taken into account the after tax cost can be considerably reduced.
But, if you ever need to claim on your income protection policy, the monthly benefits you receive will be counted towards your taxable income – so the taxman wins that way!
Use our online quoter to compare income protection options:
When is an income protection premium not tax deductible?
You cannot claim a personal tax deduction if you have income protection through a superannuation fund, including a SMSF. In this case it is the fund who owns the policy and incurs the expense of the premium, not you. The fund will be able to claim the premium as an expense and this will reduce the tax payable by the fund.
You can also not claim a tax deduction for any part of your income protection premium which relates to included benefits which are lump sum or capital payments. These benefits may include the Lump Sum TPD option, Trauma/Critical Illness benefit or Specified Injury benefit, or other benefits deemed not to be replacing income.
How to claim an income protection tax deduction for premiums paid
If you have an income protection policy your insurance company will send you a tax statement each year. This will show the premiums you have paid and how much you can claim as a tax deduction.
If your policy also includes cover for Life (Death), TPD or Trauma/Critical Illness your insurer’s statement will only show the portion of the total premium which relates to your income protection cover.
These statements are usually sent out within one to two months of the end of the financial year. If you do not receive a statement you should request one from your insurance company.
When completing your tax return enter the claimable amount of the income protection premium as a work tax deduction in the “Other deductions” category.
Only premiums paid in the current financial year can be claimed so if you are taking out a new policy you need to ensure that your annual premium is received by the insurer before 30th June.
How much tax you will save will depend on your marginal tax rate
Let’s look at an example:
If your taxable income is over $190,000 pa in 2025/2026 your applicable marginal tax rate is 45% (excluding the Medicare Levy).
In this example if your income protection annual premium of $1,000 is fully tax deductible you would…
| Pay the insurer | $ 1,000 |
| Receive a tax refund of | $ 450 |
| Receive 10% back from Insurance Watch at end of first year | $ 100 |
| NET COST of Income Protection in first year ( a saving of 55%) | $ 450 |
For incomes between $135,000 and $190,000 the current marginal tax rate is 37% and the net cost would be $530 – a saving of 47%.
For incomes between $45,000 and $135,000 the current marginal tax rate is 30% and the net cost would be $600 – a saving of 40%
For incomes between $18,200 and $45,000 the current marginal tax rate is 16% and the net cost would be $740 – a saving of 26%
These tax savings, when added to Insurance Watch’s 10% cashback, can make income protection very affordable. Run your own quotes now.
Please Note: the above information is of a general nature only and does not constitute personal advice. You should not act on this information without considering your personal needs, financial situation and objectives. We recommend you seek advice from a tax professional regarding your own situation.