Tax Relief & Life Insurance

  TAX DEDUCTABLE LIFE INSURANCE 

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TAX DEDUCTIBLE ~ RELEVANT LIFE INSURANCE      

Providing death in service benefits for employees in 2018 can inadvertently create potential tax problems for those high earners with substantial pension funds. If you are having trouble getting access to a group scheme because your company is considered to have too few employees then taking out a Relevant Life Policy could be a tax efficient way of helping to provide the valuable life cover and financial security you want for your employees & for your family.

Relevant Life Policy - Typical Key Features

  • The plan is restricted to providing just life cover & can be level, decreasing or increasing 
  • These policies are designed for individual employees who may require: more life cover than the main Company scheme provides
  • Or where the number of employees is too low for a company group scheme.
  • Cannot contain any waiver of premium payment, critical illness or income protection benefits 
  • Must usually cease before the life assured's 75th birthday
  • Your company can pay the policy premiums usually as an allowable deduction
  • Premiums are paid without them being treated as a benefit in kind
  • Your policy premiums are treated as an allowable business expense
  • Premiums are likely to be an allowable deduction against Corporation Tax 
  • There is no liability for National Insurance for you or your employee
  • There is no Income Tax liability for your employee
  • Typical salary X limits cover - ages 17/30 upto 25 X, ages 30/40 upto 20 X, ages 40/60 upto 15 X, ages 60/73 upto 10 X
  • Benefits maybe paid tax free to their nominated beneficiaries & subject to IHT tax rules
  • Policy premiums do not form part of an individual's annual or lifetime allowance.
  • Any employee of a business, including directors
  • The business can be a limited company, a partnership, a charity or a sole trader
  • Does not usually form part of annual or lifetime allowance
  • Must usually be setup into trust before the policy starts
  • Tax avoidance must not be the main reason for using this scheme
  • Usually cannot cover sole traders or equity partners themselves & where they are taxed under schedule D
  • 'Salaried' partners who are taxed as schedule E can be covered
  • Maybe be able to switch back policy into personal lifecover if you leave the company or the company closes
  • Any employee of a business, including directors

Relevant Tax Efficient / Tax Deductable Life Policy example

Let us compare the cost of Mr LBD arranging his own life assurance against the same lifecover arranged & paid for through his employer's LBD Ltd scheme using a Relevant Life Policy.

Mr LBD is a shareholding director of LBD Ltd. He currently pays for his life cover personally at a cost of £200 per month out of his post tax salary. Mr LBD is also a business owner. If we look at both his personal and business costs and the effect of taxation of providing this cover.
Mr LBD is a higher rate taxpayer, he pays 40% Income Tax on the higher part of his salary. He also pays the additional 1% rate above the upper earnings limit for National Insurance. We have assumed the policy premiums for his plan are taken from his higher marginal rate of tax and have used these rates in our calculation. LBD Ltd pay employer's National Insurance contributions at the 'contracted in' rate of 12.8%. In this example salary, National Insurance contributions and Relevant Life Policy premiums are all treated as allowable deductions for the purposes of Corporation Tax.

  • Mr LBD paying personally for life cover Monthly policy premium paid from his post tax income. = £200pm.
  • Pre-tax income needed to fund £200 at Income Tax rate of 40% and employee National Insurance at 1% additional rate. = £338.98
  • Employer's National Insurance contributions at 12.8% on this amount of salary paid by LDB Ltd. = £43.39
  • Total cost to LBD Ltd and Mr A = £382.37
  • Less Corporation Tax at an example rate 20% as an allowable deduction. Salary, Income Tax and National Insurance are allowable expenses against Corporation Tax.
  • Personal gross total monthly cost to Mr LBD & LBD Ltd = £302.07pm
  • LBD Ltd now pays for life cover instead via a Relevant Life Policy
  • Monthly policy premium paid by LBD Ltd = £200pm
  • No Income Tax, employee's or employer's National Insurance payable. = £200pm
  • No employer's National Insurance contribution.
  • Less Corporation Tax at example rate 20% - as the plan is an allowable deduction.
  • Total net cost to LBD Ltd = £160.00pm

* Mr LBD paying personally may cost him and the business = £302.07pm  * LBD Ltd paying through a Relevant Life Policy costs = £160.00pm.

[A saving of £142.07pm or a saving of over 47%]

Tax Relief - Life Insurance Quotes

  Conclusion re above example 
The life cover policy premiums are therefore paid in a more tax efficient way by LBD Ltd as compared to just Mr LBD paying for the life cover benefits personally. The good news is that co directors working day to day in a business on a Pay As You Earn (PAYE) basis, are likely to qualify for
this arrangement whereby you could also take out life cover to help protect the financial security of your loved ones.

Please bear in mind that tax treatment depends on your individual circumstances and may also change in the future.

NOTE: Relevant Life Policies are not designed as a replacement to registered group
schemes but can be a very useful tax efficient alternative to provide valuable
death in service benefits for you &your employees. For help with Relevant Life Policy click here

Any reference we make to taxation & rates is based on an understanding of current legislation and HM Revenue & Customs practice, which can change from time to time.

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