For many employees, a ‘death-in-service’ benefit, provided by their employer provides the cornerstone of their family financial protection portfolio. However, those who own or are employed by a small business may not have such a protection scheme in place. This means that these individuals will be reliant on personal life policies to protect their families in the event of death.
A solution has been developed in recent years that help directors and employees of small businesses benefit from life insurance that is paid for by the company and the premiums are tax-deductible. This type of plan is called relevant life insurance.
What is relevant life insurance?
A relevant life insurance policy is applied and paid for by the business with the employee or director is the life assured. The policy is written into trust so it pays out the benefit into the trust for the employee’s beneficiaries if the employee dies or is diagnosed with a terminal illness during the term of the policy.
In most cases, the cost of the insurance, paid by the company, is deemed to be an ‘allowable business expense’. If this is the case then the cost of the insurance will become part of the employee’s overall remuneration package.
Relevant Life insurance is Tax Efficient for:
Although the premiums are paid for by the business, the premiums are not treated as a benefit-in-kind so no Income Tax or National Insurance on the insurance is payable for the premiums paid on their behalf.
Unlike a group death-in-service insurance scheme, a relevant life policy is deemed to be ‘non-registered’ which is important as any claim paid out does not count towards an employee’s pension Lifetime Allowance. If the lifetime allowance is exceeded by pension savings, death in service benefit, or a combination of the two, a tax charge is payable. Relevant life insurance could, therefore, be a viable option for high earning employees affected by the pension lifetime allowance.
Providing the local inspector of taxes deems the policy premiums to be ‘wholly and exclusively’ for the purposes of trade, they qualify as an allowable business expense. This, therefore, reduces the business’s corporation tax bill.
As the policy is written into trust, any lump sum is paid into the trust for the beneficiaries and is not liable to Income Tax and usually free from Inheritance Tax.
Writing the Policy into Trust
A condition of relevant life insurance is that it has to be written into trust from the outset. The beneficiaries have to be the employee’s family or dependents.
The trust may be subject to periodic and exit charges, which are beyond the scope of this article but these shouldn’t apply providing any lump sum payment into the trust is paid out to the beneficiaries as soon as possible.
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Case Study Example – Demonstrating the Potential Tax Savings
Company Director Gina is a higher rate taxpayer.
Scenario 1 – Gina takes out a personal life insurance policy, paid for out of her net salary.
|Cost to Gina|
|Employee National Insurance||£3.45|
|Higher Rate income Tax @ 40%||£68.96|
|Gross Earnings Required||£172.41|
Scenario 2 – Gina’s company takes out and pays for a Relevant Life insurance policy on her behalf.
|The cost to the Company|
|Employer National Insurance||n/a|
|Less Corporation Tax Relief @ 20%||£20|
|Total Adjusted Cost||£80|
As you can see this provides Gina and the company with a combined saving of £92.41.
- Check that the life assurance you have in place is suitable and meets your family’s needs.
- Costs of the premiums are met by the business and are usually an allowable business expense. Also, premiums are not classed as a benefit-in-kind for employees so no income tax or national insurance is payable on the premiums
- Relevant life insurance can be considered for those approaching or exceeding their pension Lifetime Allowance.
- Significant cost and tax savings can be potentially be achieved.
- As the policy must be paid by an employer, if you leave the employment of the business, the policy will either have to be transferred to your new employer, or the switched to a personal policy, where the premiums for the policy are paid for out of your disposable income.