Posted on: 28th Mar 2012
Relevant Life Policies
Whether or not you currently have, now is the perfect time to review your situation and see if you would be better off with a Relevant Life Policy.
What is a Relevant Life Policy?
A Relevant Life Policy is a single life plan, taken out on the life of an employee by an employer to provide death in service benefits. They are designed for individual members who may require life cover over and above that of the main company scheme already available to them or, where the number of employees is too low for a company group scheme.
These plans are restricted to providing life cover only and can not contain any waiver, critical illness or income protection benefits and must cease before the client’s 75th birthday. The policy premiums are paid in a more tax efficient way by the employer compared to employees paying for their life cover benefits personally.
The good news is, directors working day to day in a business are likely to qualify as employees so they can benefit from this possible cheaper way of providing life cover.
Why take out a Relevant Life Policy?
The company can make the payments, usually as an allowable deduction without them being treated as a
benefit in kind, which means:
• The policy premiums are treated as a business expense and are likely to be an allowable deduction against Corporation Tax for the employer
• These policy premiums don’t form part of an individual’s annual or lifetime allowance.
• There is no liability for the employer or employee to National Insurance on the policy premiums
• There is no liability for the employee to Income Tax on the policy premiums
• Life cover benefits are paid tax free to the nominated beneficiaries
Let’s now look at this in practice
Mr A is a shareholding director of SDL Ltd. He currently pays for his life assurance personally at a cost of £200 per month out of his post tax salary. As Mr A is also a business owner, we will look at both his personal and business costs and the effect of taxation of providing this cover.
Mr A is a higher rate taxpayer, he pays 40% Income Tax on the higher part of his salary. He also pays the additional 2% 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. SDL Ltd pay employer’s National Insurance contributions at the “contracted in” rate of 13.8%. 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 A paying personally for life assurance
Monthly premium paid from his post tax income.
Pre-tax income needed to fund £200 at Income Tax rate of 40% and employee National Insurance at 2% additional rate.
Employer’s National Insurance contributions at 13.8% on this amount of salary paid by SDL Ltd.
Total cost to SDL Ltd and Mr A
Less Corporation Tax at 20% as an allowable deduction. Salary, Income Tax and National Insurance are allowable expenses against Corporation Tax.
Total cost to Ali and SDL Ltd
SDL Ltd paying for a Relevant Life Policy
Monthly policy premium paid by LBD Ltd.
No Income Tax, employee’s or employer’s National Insurance payable.
No employer’s National Insurance contribution.
Less Corporation Tax at 20% as the plan is an allowable deduction.
Total cost to SDL Ltd
Mr A paying personally costs him and the business £313.93pm
SDL Ltd paying through a Relevant Life Policy costs £160.00pm
A saving of £153.93pm or a saving of over 49%.