If you’re a contractor, rather than funding the costs of a life cover policy from your post-tax personal income, you can fund the cost through your limited company.
This results in substantial net savings of up to 50%.
Relevant life policies also provide death-in-service benefits similar to those provided to employees of large firms.
What is relevant life insurance?
Relevant life policies provide life cover to the policyholder’s dependants, with funds paid via a discretionary trust. The company pays the premiums rather than the employee, resulting in a tax saving for the contractor.
You can take out a policy to protect yourself (the director) and extend the cover to any of your staff. This includes your spouse, provided they are receiving a salary from the company.
The proceeds from an RLP claim, upon the policyholder’s death, are held in trust for the policyholder’s dependants. This differs from traditional ‘key man’ insurance policies, which payout to the company; your dependants would be taxed on the income.
Why are relevant life policies tax efficient?
- The company pays the premiums, not out of your personal post-tax income.
- Although your dependants would benefit from a payout, the cover is not seen as a ‘benefit in kind’, so it 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 employee pays no income tax on the value of the premium because it is not a benefit-in-kind.
- The premiums should be an allowable expense, offset against your company’s Corporation Tax bill. See EIM15045.
How much money could you save?
For example, paying £20/month towards your current life cover policy from traditional salaried income is equivalent to £33/month gross (as a higher-rate taxpayer).
If the company pays the £20/month premium, you will receive at least 19% corporation tax relief, so it costs you only £16.20 net. Corporation Tax rates rose in April 2023, so you could save up to 25% in CT relief.
Calculate your potential savings
For example, a £100/month policy for a higher-rate taxpayer (40%) and an employer paying 25% Corporation Tax results in yearly savings of over £850—an almost 50% saving compared to a traditional policy.
The savings can be remarkable. Try our relevant life calculator to input your own figures.
These calculations demonstrate the tax efficiency of an 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.
This ringfences the lump sum, allowing the trustees to distribute the funds quickly without the need to deal with probate.
How much life cover?
You can cover up to 30 times your annual income (the maximum annual limit being £10 million). As you get older, the maximum multiples reduce – typically to 15 times if you’re over 50 years old.
So, for example, a 30-year-old could get approximately 30 times their annual income; if you currently earn £50,000 per year (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 contractor specialists, Broadbench, our long-term partner IFA.
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For further information, try this guide – 8 key facts about relevant life cover for limited company owners.