If you’re considering buying a life insurance policy to protect your family, relevant life cover is a very tax-efficient way of taking out cover via your own limited company.
What is Relevant Life Insurance?
This type of protection is similar to a ‘death in service’ policy often provided to traditional employees. A Relevant Life Policy (RLP) is a tax-efficient way to provide a cash sum to employees of private limited companies (such as contractors) should they die.
The policy is paid for by your limited company, written in trust, and the premiums are an allowable business expense. It is particularly attractive to small company owners who don’t have the resources or the need to set up a group life scheme.
Here are 8 key facts you should know about Relevant Life insurance.
1. Significant Corporation tax relief
Unlike standard life insurance policies, which are paid for out of your post-tax income, relevant life premiums are paid by your limited company – and are offset against your company’s Corporation Tax bill.
This can result in tax savings of up to 50% (higher rate taxpayer), as the premiums can typically be claimed as a legitimate business expense, providing that they are provided “wholly and exclusively for the purposes of the business”.
This rule is detailed in the UK Income Tax (Trading and Other Income) Act 2005, Section 34. This means that as long as the policy is intended to benefit the business (e.g., to protect against the financial loss from the death of a key employee), the premiums can usually be deducted from the business’s taxable profits.
Following the April 2023 hike in Corporation Tax, any costs you can legitimately offset against your company’s tax bill are even more valuable than ever. The effective CT rate on profits between £50,000 and £250,000 is 26.5% for the 2023/4 tax year!
Ordinarily, a standard policy will be funded by you (as an individual) from funds which have been subject to Corporation Tax, income tax/dividend tax and National Insurance Contributions.
2. No benefit in kind
You do not need to declare the insurance policy premiums on your annual P11D form, as they are not deemed to be a ‘benefit in kind’.
Benefits-in-Kind (BIK) are benefits that employees or directors receive from their employment that aren’t included in their salary.
Therefore, the employee does not need to pay additional income tax on the value of the premiums.
Similarily, the limited company does not have to pay employers’ NICs of 13.8% on the value of the benefit.
3. Who can benefit?
Employees of many small businesses, including directors, can be covered by a RLP – such as limited companies. However, some business types are not eligible, such as sole traders (see restrictions below).
4. No impact on pension lifetime allowance
As per the Pension Act 2004, the lifetime allowance is a limit on the amount of funds that can be contributed to UK registered pension schemes without triggering an extra tax charge.
As Relevant Life Policies are not registered pension schemes, the benefits provided by such policies are not counted towards your pension lifetime allowance.
The premiums also have no effect on the pension annual allowance.
5. No Inheritance Tax implications
In the majority of cases, Inheritance Tax is not payable on any sums paid out by the insurer, as the cover is written in trust.
6. Salary plus dividends can be used to work out cover
You can use the combined value of your salary and dividend draw-downs to work out the maximum amount you can insure your life for. In most cases, this will be 15 to 30 times your annual income.
Understandably, the maximum multiples of income available reduce with age. So, a 30-year-old contractor may be able to secure cover of 30 times income, whereas a 60-year-old may have to settle for 15 times.
7. Your policy should be portable
Should you decide to take out cover, but then move back to a permanent job, your RLP will typically be portable, so your new employer should be able to continue payments.
8. Some restrictions do apply
For an RLP to meet all regulatory requirements, there are several restrictions you should be aware of.
- The policy must include life insurance but cannot include critical illness or income protection as well.
- A RLP will cover employees up until the age of 75.
- The policy can only be taken out by a UK-based business, on behalf of a UK resident.
- There is no surrender value if your company stops paying its premiums.
- Some business types cannot take out an RLP, such as a sole trader; a sole trader, by definition, doesn’t have an employer to take out the policy.
Find out more about Relevant Life Cover
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