Effective Income Protection Premiums

Income Protection Insurance premiums are tax deductible for most taxpayers in Australia, therefore it's important to understand what your effective income protection premiums are.

Current Tax Rates in Australia

The following are the personal income tax rates for the financial year 2010-2011 in Australia:

  • $0 - $6,000 - Nil
  • $6,001 - $37,000 - 15c for each $1 over $6,000
  • $37,001 - $80,000 - $4,650 plus 30c for each $1 over $37,001
  • $80,001 - $180,000 - $17,550 plus 37c for each $1 over $80,000
  • $180,001 and over - $54,550 plus 45c for each $1 over $180,000

What this means in Marginal Tax Rates are as follows:

  • $0 - $6,000 - Nil
  • $6,001 - $37,000 - 15c for each $1, i.e. 15%
  • $37,001 - $80,000 - 30c for each $1, i.e. 30%
  • $80,001 - $180,000 - 37c for each $1, i.e. 37%
  • $180,001 and over - 45c for each $1, i.e. 45%

As income protection premiums are 100% tax deductible so these are the rates that you will get back of your premiums.

Effective Income Protection Premiums - 3 scenarios

To better understand your effective premiums let's analyse 3 possible scenarios.

Scenario 1. Let's say your income protection premium is $100 per month and your annual income is $42,000 p.a. What is your annual premium after tax?

As your income fits into 30% marginal tax rate brackets you will receive 30% back when you do your tax return.

  • You will receive a tax refund of ($100 x 12 months = $1200 x 30%) = $360
  • Your annual premium after tax will be ($1200 - $360) = $840

Scenario 2. Let's say your annual income protection premium is $2,500 and you earn $85,000 p.a. How much will you get back when you do your tax return?

In this case your income falls into 37% marginal tax rate, so your premiums will be reduced by:

  • $2,500 x 37% = $925

Scenario 3. Your premium is $600 a month and you earn $82,200 p.a. How much will you get back and what are your annual premium after tax will be this time?

In this case calculations are more complex as part of your premium is deductible at a 37% marginal tax rate and another part at 30%:

  • As $2,200 is above 80,000 this will be deductible at 37% so your tax refund will be ($2,200 x 37%) = $814
  • The remainder will be in the 30% Marginal Tax Bracket meaning your refund will be ($5,000 x 30%) = $1,500
  • Total tax refund = $814 + $1,500 = $2,314

Your effective income protection premiums becomes: $7,200 - $2,314 = $4,886. So instead of paying $20 per day you actually paying $13.60 per day. A huge difference!

Income Protection Insurance Quotes

Every time you receive a quote for income protection insurance please bear in mind that premiums are tax deductible. And if you call us on 1300 793 143 or fill out the form on this page one of our friendly advisers not only compare all major insurance companies to find you the best income protection deal but also will calculate your effective after tax income protection premium if you ask.

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Published on November 11-th, 2010 in Income Protection Insurance
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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