If you’re a limited company owner, you will be pleased to hear that rather than funding the costs of a life cover policy from your post-tax income, your company can fund a relevant life policy (RLP), which provides death-in-service benefits similar to those provided by larger employers to their employees.
What is relevant life insurance?
Relevant life policies provide life cover to dependents of the policy holder, with funds paid via a discretionary trust. The premiums are paid for by the company, rather than the employee, which results in a tax saving for the contractor.
Not only can you take out a policy to protect you (the director), but you can also extend the cover to any of your staff, including your spouse – as long as they are receiving a salary from the company.
The proceeds from an RLP claim, upon the policy holder’s death, are held in trust for your dependents, unlike the traditional ‘key man’ insurance policies which pay out to the company, and your dependents would be taxed on the income.
Why are relevant life policies tax efficient?
- The premiums are paid from the company, not out of your personal post-tax income.
- Although your dependents would benefit from a pay-out, the cover is not seen as a ‘benefit in kind’, so does not need to be included on your P11D form each year.
- No National Insurance is payable on the premiums, for the company, or those covered.
- The premiums should be an allowable expense, offset against your company’s Corporation Tax bill. See EIM15045.
- The premiums are not counted towards your annual pension allowance limit.
How much money could you save?
As an example, if you are paying £20/month towards your current life cover policy, paid for out of traditional salaried income, this is the equivalent of £33/month gross (as a higher rate taxpayer).
If the £20/month premium is paid for by the company, you will receive 19% corporation tax relief, so it costs you only £16.20 net.
In fact, the savings can be remarkable. In the example below, based on 2022/23 tax bands, you could save over 50% by funding your life policy as a business expense, compared to paying for a standard policy out of a post-tax salary.
| Standard Policy | Relevant Life Policy | |
|---|---|---|
| Premium Cost | £100 | £100 |
| Gross salary required (higher rate – 40% income tax band) | £176.21 | – |
| Employees’ NICs (2%) | £3.52 | – |
| Income Tax | £70.48 | – |
| Employers’ NICs (13.8%) | £24.32 | – |
| Corporation Tax saved | (£38.52) | (£19) |
| Net Cost of Policy | £159.80 | £81 |
If your highest rate of income tax is 45% (additional rate), the savings can be higher – up to 55%. If your highest rate of income tax is 20% (basic rate), you will still save over 40% by opting for a relevant life policy.
This is an illustration to demonstrate the tax efficiency of a RLP versus a traditional life cover policy. You should always check with your accountant to produce an individual calculation.
What restrictions apply?
- This type of policy must include life cover, but not critical illness.
- The policy will only cover employees until they reach the age of 75.
What about inheritance tax?
In most cases, the benefits of an RLP won’t become liable for Inheritance Tax, as funds are paid out via a simple discretionary trust.
How much life cover?
You can cover up to 30x your annual income (the maximum annual limit being £10m).
So, as an example, a thirty-year-old could get approximately 30x their annual income; if you currently earn £50,000 per year (in salary plus dividends), you could take out £1.5m of cover.
Find out more about your Relevant Life options
Complete this short form for a rapid response from our recommended partners, Broadbench, who specialise in providing relevant life cover for contractors and other small business owners.
Excellent customer service is at the heart of everything they do. Hundreds of our visitors have taken out life cover via Broadbench over the past few years.
For further information, try this guide – 8 key facts about relevant life cover for limited company owners.