Tax Efficient Life Protection

Tax efficient life protection

If you are a company director and have life or life and critical illness cover to protect your family, you could be paying more tax than you need to. Relevant Life policies are a way of providing death-in-service benefits on an individual basis no matter how small your business is.

Relevant Life policies could suit higher paid directors, business owners and other employees who want high levels of life cover, with tax and other benefits that normally only apply to large group schemes.

What are the benefits?

Although the company pays the premiums, they are not treated as a benefit in kind, so they wouldn’t be included in your income tax assessments. This can be a significant saving, particularly for a higher rate taxpayer.

Unlike registered group schemes, the benefit will not form part of your annual or lifetime pension or allowance.

These payments may be treated as an allowable expense for the company in calculating it’s tax liability, as long as the local inspector of taxes is satisfied they qualify under the “wholly and exclusively” rules.

Relevant life policies may be relevant for

  • Small businesses that don’t have enough eligible employees to warrant a group life scheme
  • High-earning employees or directors who have substantial pension funds and don’t want their benefits to form part of their lifetime allowance
  • Self-employed or equity partners’ staff

Relevant Life Policies

How a Relevant Life policy can cut tax on company costs

    Ordinary life plan Relevant life plan
Payment   £1,000 £1,000
Company gross cost Employer’s National Insurance contribution at 2% £34 –
  Income tax at 40% £690 –
  Employer’s National Insurance contribution at 13% £238 –
  Total gross cost £1,962 £1,000
Company net cost Corporation tax relief at 20% £392 £200*
Net cost   £1,570 £800*
Saving   – £770

* Assumes that corporation tax relief at 20% has been granted under the ‘wholly and exclusively’ rules.

What are the advantages of using a discretionary trust?

Having benefits paid through a trust makes sure they can’t be taxed as part of the company’s trading income, nor do they form part of the company’s assets

The trust is discretionary, allowing trustees to be flexible in who they pay the benefits to. However, the person covered can advise the trustees of their intentions by completing a nomination form.

Using a trust also makes sure that in most circumstances benefits are paid free of both income tax and inheritance tax.

Are there any disadvantages?

There are restrictions in the legislation on who benefits can be paid to. The use of the trust is the most practical way to make sure you meet these requirements. The beneficiaries who could be included are usually family members and dependants.

Are there any limits to the cover I can have?
The legislation does have some limits to qualify for the tax concessions, and to make sure these are met:

  • The cover must be paid in a single lump sum before the age of 75
  • Benefits must be paid through a discretionary trust
  • Beneficiaries are normally restricted to family members and dependants