# How to set up group income protection > Set up group income protection: deferred period, benefit level and term, incapacity definition, pension cover, rehabilitation, tax and the link to. Source: https://lumihr.co.uk/guides/how-to-set-up-group-income-protection Author: David Whitfield (https://lumihr.co.uk/about/david-whitfield) UK law as at: 20 September 2026 Review by: 6 April 2027 --- *By David Whitfield · Reflects UK law as at 20 September 2026 · Review by 6 April 2027* > **In short** > - Group income protection (GIP) is an insured policy that replaces part of an employee's salary during long-term sickness, after a deferred period. > - It sits alongside statutory sick pay (SSP), the lower of £123.25 a week and 80% of average weekly earnings, for up to 28 weeks. Where GIP benefit starts before those 28 weeks run out, SSP may still be due for the same weeks: agree the treatment with your insurer and payroll. > - Premiums you pay are not a taxable benefit for the employee. Benefit paid through payroll is taxed as earnings. > - In the lumi reward benchmark, 64.3% of organisations do not offer income protection (n = 269). > - By the end you will have made the six main design choices and set up payroll and communication. ## Before you start **Legal basis.** The terms come from the policy and what you tell employees. The relevant law covers SSP [2], the tax and National Insurance treatment of sick pay [3][4], and the Equality Act 2010 exception for insurance [6]. **Who is involved.** HR or reward, finance, payroll, a broker, occupational health, and your pension provider. **What you need:** your company sick pay rules, an employee census in the broker's format, absence records, any existing group risk policies and a budget range. ## Step 1: Map GIP against SSP and company sick pay Since 6 April 2026, SSP has been payable from the first full day of sickness, at the lower of £123.25 a week and 80% of average weekly earnings, for up to 28 weeks. You can pay more through a company scheme, but not less [2]. Draw the timeline of a long absence: company sick pay, the end of SSP at 28 weeks, and where GIP would start. Look for gaps, where the employee has SSP alone or nothing, and overlaps. In the lumi reward benchmark, 35.7% of organisations offer income protection (18.6% long-term only + 10.0% both + 7.1% short-term only) and 64.3% do not (n = 269). Long-term cover is offered by 28.6% (18.6% + 10.0%). See the [full findings](/research/group-risk-benefits-2026). ## Step 2: Appoint a broker and compare insurers - Check the firm is on the FCA's Financial Services Register [5]. - Agree how the broker is paid, by commission or fee, and how much. - Ask for prices on the options in Steps 3 to 8, so you can see what each choice costs. - Ask what claims and rehabilitation reports you will get. Compare insurers on premium, rate guarantee, free cover limit, claims handling and rehabilitation. ## Step 3: Set the deferred period The deferred period is how long an employee must be continuously unable to work before benefit starts. In the lumi reward benchmark, among organisations offering income protection, a waiting period of 4–13 weeks is common (46.2%). Under 4 weeks (26.4%) and 14–26 weeks (24.2%) are alternatives. 27 weeks or more is rare (3.3%) (n = 91). **◆ Decision: deferred period.** - *Match the end of company sick pay:* no gap and no overlap. Employees with little company sick pay wait longer. - *Shorter than company sick pay:* support starts sooner and the benefit takes over part of your sick pay cost, but the premium is higher and the overlap needs rules. - *Longer than company sick pay:* a lower premium, but a gap with SSP only, or nothing after 28 weeks. If benefit starts before SSP's 28 weeks run out, SSP may still be due for the same weeks. Agree with the insurer and payroll how the two are treated. ## Step 4: Set the benefit level Set the benefit as a percentage of salary, and define salary: basic pay only, or with allowances or bonus. In the lumi reward benchmark, a salary replacement rate of 66–75% is common (38.5%) and 50–65% is an alternative (37.4%). 76% or more (18.7%) and under 50% (5.5%) are rare (n = 91). **◆ Decision: benefit level.** - *Higher rate:* a smaller drop in income, a higher premium, and less difference between income at work and on claim. - *Lower rate:* a lower premium and a larger drop in income. - *Increases in payment:* none, fixed or index-linked. Increases protect value over a long claim, at extra cost. **Worked example.** Inputs: an illustrative salary of £40,000 a year; benefit of 75% of salary; pension contribution cover for a 5% employer and a 5% employee contribution (Step 7). ```python salary = 40_000 # illustrative annual salary replacement_rate = 0.75 employer_pension = 0.05 employee_pension = 0.05 ssp_weekly, ssp_weeks = 123.25, 28 monthly_benefit = salary * replacement_rate / 12 pension_cover = salary * (employer_pension + employee_pension) / 12 print(f"Monthly benefit at 75%: £{monthly_benefit:,.2f}") print(f"Monthly benefit at 50%: £{salary * 0.50 / 12:,.2f}") print(f"Pension contribution cover: £{pension_cover:,.2f} a month") print(f"Maximum SSP over 28 weeks: £{ssp_weekly * ssp_weeks:,.2f}") ``` **Result:** a gross monthly benefit of **£2,500.00**, or £1,666.67 at 50%. Pension contribution cover adds **£333.33** a month. SSP at the flat rate for the full 28 weeks totals £3,451.00. ## Step 5: Choose the benefit period **◆ Decision: benefit period.** - *Limited term (a set number of years per claim):* a lower premium. Benefit can stop while the employee is still unable to work. - *To the scheme's end age:* income for as long as the incapacity lasts. A higher premium, and some claims run for many years. Check whether benefit continues only while the employee stays employed. Take legal advice before ending the employment of someone on claim. If cover stops at a set age, check it. Under the Equality Act 2010, an employer arranging insurance through another person may provide it until the employee reaches the greater of 65 and State Pension age, and may limit it to employees below that age [6]. State Pension age is at least 66 and increases to 67 between 2026 and 2028 [7]. ## Step 6: Choose the incapacity definition This is the insurer's test for paying a claim. **◆ Decision: incapacity definition.** - *Own occupation:* unable to do their own job. The widest test and the highest premium. - *Suited occupation:* unable to do their own job or one suited to their experience and training. A middle position. - *Any occupation:* unable to do any work. The lowest premium, and fewer claims accepted. Some policies change the test after a period on claim. Compare each insurer's wording. ## Step 7: Decide on pension contribution cover This pays pension contributions while an employee is on claim. **◆ Decision: pension contribution cover.** - *None:* the lowest cost. Pension saving stops, or you fund it yourself. - *Employer contribution only:* your contribution continues; the employee's stops. - *Employer and employee contributions:* saving continues at its pre-absence level, at the highest cost. Confirm the process with your pension provider. ## Step 8: Plan how you will use rehabilitation and early intervention Policies can include case management, vocational rehabilitation and funded treatment, sometimes before the deferred period ends. Find out what is included and when you can refer. In the lumi reward benchmark, among organisations offering GIP, 45.8% rarely use these services (common), 31.9% are unaware of them and 22.2% actively use them (both alternatives) (n = 72, 'not applicable' answers excluded). **◆ Decision: when to refer.** - *Early, at a set trigger* such as length of absence: support starts sooner, but managers need training and a process for sharing health information. - *At claim only:* less administration, but support starts later. ## Step 9: Decide what sits alongside: life assurance and critical illness In the lumi reward benchmark, life assurance of 2× salary is common (50.2%) and 3× is an alternative (23.0%). 4× or more (19.7%) and 1× (7.1%) are rare (n = 239, 'not applicable' answers excluded). Among organisations answering on critical illness, a fixed lump sum is common (40.7%). 1× salary (37.3%) and 2× or more (22.0%) are alternatives (n = 59). - **Life assurance.** The employer's cost of providing a lump sum payable on the employee's death is exempt from the benefits charge under section 307 of ITEPA 2003 [8]. - **Critical illness.** This pays a lump sum on diagnosis of a specified condition. HMRC's manual says the payment is not taxable as income for the recipient [9]. The premium is treated differently from the other two. Critical illness cover is not provision for death or retirement, so the section 307 exemption does not reach it, and unlike income protection it is outside the section 202(1)(c) sick pay let-out [3][10]. The employer's cost is an employment-related benefit under Chapter 10 of Part 3 of ITEPA 2003, taxable on the employee [10]: report it on form P11D and pay Class 1A National Insurance at 15% [11][12]. **◆ Decision: packaging.** - *One insurer for all group risk:* one renewal and one set of eligibility rules, but less choice product by product. - *Separate insurers:* terms chosen per product, with more contracts to manage. ## Step 10: Set up payroll and tell employees **Premiums.** HMRC's manual says that where sick pay is provided under an arrangement with an insurer, the right to receive it "is not a benefit chargeable under the benefits code" [3]. Salary sacrifice arrangements follow different rules [3]. **Benefit.** Sick pay you fund through insurance is taxable as earnings, whether it reaches the employee through your payroll or direct from the insurer [3]. Class 1 National Insurance is due on sick pay from an insured scheme you arranged and contribute to [4]. Where the employee also pays part of the premium, tax and Class 1 National Insurance apply only to the share attributable to your contributions [3][4]. **Payroll.** If benefit comes through payroll, deduct tax and National Insurance as for pay. Agree how SSP and pension contributions sit alongside it. **Communication.** Tell employees in writing who is eligible, the main terms, that benefit is taxed as earnings, whether it is contractual, and how to report sickness early. Brief line managers on early referral. Repeat this at joining, at renewal and during long absences. ## Checklist - [ ] Timeline mapped for company sick pay, SSP and GIP - [ ] Broker checked on the Financial Services Register and pay agreed - [ ] Deferred period set against company sick pay - [ ] Benefit level, salary definition and increases in payment set - [ ] Benefit period chosen, and any end age checked against the greater of 65 and State Pension age - [ ] Incapacity definition compared across insurers - [ ] Pension contribution cover confirmed with the pension provider - [ ] Rehabilitation triggers agreed, and life and critical illness cover reviewed - [ ] Payroll set up to deduct tax and National Insurance on benefit - [ ] Employee and manager communications issued ## FAQ **Is group income protection a taxable benefit?** No. HMRC treats the right to receive insured sick pay as outside the benefits code. Benefit paid out is taxed as earnings. **Do we still have to pay SSP if we have income protection?** SSP is the statutory minimum for up to 28 weeks, and it may still be due for weeks in which GIP benefit is also paid. Agree with the insurer and payroll how any overlap is treated. **How much of salary does income protection replace?** In the lumi reward benchmark, 66–75% is common (38.5%) and 50–65% is an alternative (37.4%) (n = 91). **Can income protection cover stop at age 65?** An end age of 65 falls outside the Equality Act 2010 exception, which runs to the greater of 65 and State Pension age. Take advice before setting an end age. ## Related - [Group risk benefits: UK benchmark 2026](/research/group-risk-benefits-2026) — the benchmark findings behind the figures in this guide. - [How to review your private medical insurance scheme](/guides/how-to-review-private-medical-insurance) - [How to calculate statutory sick pay under the 2026 rules](/guides/how-to-calculate-statutory-sick-pay) - [How lumi works: methodology](/methodology) — how these figures are collected and calculated. ## Sources 1. lumi reward benchmark, collection window 2026 H1, national figures: [full findings](/research/group-risk-benefits-2026) 2. GOV.UK, *Statutory Sick Pay (SSP): employer guide* (updated 9 September 2026). https://www.gov.uk/employers-sick-pay 3. HMRC, *Employment Income Manual*, EIM06410 (updated 12 August 2026). https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim06410 4. HMRC, *National Insurance Manual*, NIM02345 (updated 22 July 2026). https://www.gov.uk/hmrc-internal-manuals/national-insurance-manual/nim02345 5. Financial Conduct Authority, *Financial Services Register* (updated 13 February 2026). https://www.fca.org.uk/firms/financial-services-register 6. legislation.gov.uk, *Equality Act 2010*, Schedule 9, paragraph 14. https://www.legislation.gov.uk/ukpga/2010/15/schedule/9/paragraph/14 7. Department for Work and Pensions, *State Pension age timetable* (updated 15 May 2014). https://www.gov.uk/government/publications/state-pension-age-timetable/state-pension-age-timetable 8. HMRC, *Employment Income Manual*, EIM21800 (updated 12 August 2026). https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21800 9. HMRC, *Insurance Policyholder Taxation Manual*, IPTM6010 (updated 3 February 2026). https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm6010 10. legislation.gov.uk, *Income Tax (Earnings and Pensions) Act 2003*, section 201 (employment-related benefits) and section 307 (death or retirement provision). https://www.legislation.gov.uk/ukpga/2003/1/section/201 11. GOV.UK, *Expenses and benefits: A to Z* (P11D reporting and Class 1A). https://www.gov.uk/expenses-and-benefits-a-to-z 12. GOV.UK, *Rates and thresholds for employers 2026 to 2027* (Class 1A at 15%). https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027 *This guide is general information about UK employment law and practice as at the date shown. It is not legal advice. Take advice on your own circumstances.* **Want to see how your policy compares with other UK employers?** [Book a call](https://lumihr.co.uk/demo)