Small companies with five or fewer employees aren’t typically large enough to provide a group life insurance scheme.
This means employees have to take out their own policies and pay the costs from post-tax income. Alternatively, they may decide not to make any provision at all.
However, if you own or work for a limited company, you can take out life insurance via your business.
As a result, you can benefit from tax relief and significant savings.
This is where the concept of relevant life insurance comes in.
What is relevant life insurance?
This is a type of life insurance policy for an individual employee, including the owner of the business. It is not available to individuals taxed as ‘self employed’, i.e. sole traders.
The policy premiums are paid for by the company and are written into a discretionary trust.
The trust pays out a lump sum to the individual or their beneficiaries if they die while employed.
Some policy providers also pay out if the individual is diagnosed with a terminal illness during the policy term.
As premiums are paid by the company; in most cases these payments are treated as an allowable business expense by HMRC (see EIM15045), resulting in a tax saving.
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What’s in it for you?
Taking out a relevant life policy is a smart way to buy life insurance as HMRC doesn’t consider it to be a benefit-in-kind, as long as the premiums are paid ‘wholly and exclusively’ for the purposes of the business.
Contributions to the relative life plan form part of an employee’s remuneration package, which may also include other benefits, such as contributions to an executive pension.
As a result, the employee doesn’t pay any income tax on the value of the benefit. Similarly, the company does not have to pay employers’ national insurance contributions.
Combined, these measures represent a significant saving over the life of a policy, especially for higher-rate taxpayers.
Tax efficient for the company and beneficiaries
Paying for life cover via your company has several tax benefits:
- The company claims the cost of premiums against its Corporation Tax bill @ 19%-25% (depending on annual profits). This is an allowable business expense.
- The employee (often a director) does not need to pay for cover out of his/her post-tax income. This results in a significant saving compared to the cost of buying personal life insurance (see below).
- This type of policy is also tax efficient for the beneficiaries as any pay-out in the future will not be subject to income tax or inheritance tax.
- The value of any potential payout does not count towards the employee’s lifetime pension allowance.
Non-relevant life vs. relevant life policies – the true cost
Here is a table comparing the post-tax cost of a £100 per month policy: firstly, funded out of post-tax salaried income, and secondly, funded as a business expense via a limited company.
| Traditional Life Insurance | Relevant Life Insurance | |
|---|---|---|
| Cost to Employee | ||
| Policy Cost | £100 | - |
| Gross salary needed to fund premium (pre-tax) | £176.21 | - |
| Employee NICs (2%) | £3.52 | - |
| Employee Income Tax (40% band) | £70.48 | - |
| Cost to Employer | ||
| Policy Cost | - | £100 |
| Employers NICs (13.8%) | £24.32 | - |
| Corporation Tax Saved (19%) | (£38.52) | £19 |
| Monthly Cost | £159.80 | £81 |
In this example, the potential post-tax saving for a higher-rate taxpayer is just over 50%. 2024/5 tax year figures.
Who is it suitable for?
Relevant life insurance may be suitable for the following:
- Those companies that don’t run a group life scheme but wish to provide insurance for individuals.
- Employees aged between 17 and 71 (the upper age limit is 75) when the policy is taken out. This can include sole directors of a limited company, such as IT contractors and management consultants.
- Businesses that want to provide higher earners with additional life insurance that doesn’t count towards annual or lifetime pension allowance.
- For individuals who want the company to top up any benefits they get from an existing group life scheme, which typically only covers 4 x annual salary, relevant life insurance can cover up to 30 x salary, depending on the age of the individual.
How much cover do I need?
You can take out cover for up to 30 times your annual salary. The multiple is usually dependent on your age. The younger you are at the time the policy is taken out, the higher the payout for death-in-service will be.
For example, if you’re aged 40-49, the multiple is likely to be up to 25 times your salary. For those aged 60 and above, it will be up to 15 times your salary.
What happens if you leave the company?
If you leave the company, the policy can be transferred to a new employer provided they are happy to continue paying the annual premium.
A new discretionary trust must be created, with the new employer becoming a trustee.
The policy can also be transferred to your name alone, and you would be responsible for paying the premiums.
Before exercising this option, you should speak to a financial advisor or your accountant as you may no longer qualify for the same level of tax benefit.
Other conditions may also apply. Any transfer of a relevant life policy must be completed within 90 days of you leaving your previous employer.
How to set up relevant life insurance
Our long-term partner, Broadbench, can provide you with a no-obligation quote, and answer any questions you have about setting up a life insurance policy via your own limited company.
Broadbench specialises in providing advice for company directors and has set up life cover policies for hundreds of our visitors.
Simply fill in this form, and the team will get right back to you.
