Let The Taxman Help Pay For Your Life Insurance
Tue 4th May 2010
If you’re a company director and you have life assurance in place to protect your family, you could be paying more 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.
What are the benefits?
· Although the company pays the premiums, they are not normally assessable to income tax on the employee as a benefit in kind. This can be a significant saving, particularly for a higher rate tax payer.
· Unlike a registered group scheme, the benefit will not form part of the employee’s annual or lifetime pension allowance.
· These payments may be treated as an allowable expense for the employer in calculating their tax liability, as long as the local inspector of taxes is satisfied they qualify under the ‘wholly and exclusively’ rules.
Relevant life policy v Ordinary life policy?
|
Payment
|
|
Ordinary Life Policy
£1,000
|
Relevant Life Policy
£1,000
|
|
Company Gross Cost
|
Employee’s National Insurance contribution @ 1%
Income Tax @ 40%
Employer’s National Insurance contributions @12.8%
Total Gross Cost
|
£17
£678
£217
£1,912
|
-
-
-
£1,000
|
|
Company Net Cost
|
Corporation Tax Relief @ 21%
|
£402
|
£210*
|
|
Net Cost
|
|
£1,510
|
£790*
|
* Assumes that corporation tax relief at 21% has been granted under the ‘wholly and exclusive’ rules.
In both cases we have assumed a payment of £1,000 each year for the life cover on an employee who is paying income tax at 40% and employee’s National Insurance at 1% on the top end of income. We have also assumed that the employer is paying corporation tax at the small companies’ rate of 21% and will pay employer’s National Insurance at the contracted in rate of 12.8%.
|
Who are relevant life policies suitable for?
|
|
· Small businesses that do not have enough eligible employees to warrant a group lifescheme.
· High-earning employees or directors who have substantial pension funds and do not want their benefits to form part of their lifetime allowance.
· They are not suitable for the self-employed or equity partners, although their employed staff could be covered.
|
|
Are there any limits to the cover I have?
|
|
The legislation does have some limits to qualify for the tax concessions, and to ensure these are met it requires that:
· The cover must be paid in a single lump sum before the age of 75.
· Only death benefits can be provided.
· Benefits must be paid through a discretionary trust.
· Beneficiaries are normally restricted to family members and dependants.
|
|
What is the maximum amount of cover under a relevant life policy?
|
|
· You can apply for any amount of cover up to a maximum of £5,000,000.
· The maximum cover acceptable is 20 times the employee / director’s remuneration. This can include salary, regular dividends paid in lieu of salary and any benefits in kind. This maximum reduces to 15 times remuneration for applicant over 40.
|
If you would like to find out more please contact us by phone on 02890 329042 or leave us a message.