Typically, smaller companies that have five or fewer employees aren’t large enough to provide a group life insurance scheme. In effect, this means employees have to take out their own policies and pay for it from their post-tax income, or not make any provision at all.
However, if you own or work for a small limited company, you can take out life insurance cover via your business, and benefit from tax relief and significant savings. This is where 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 but excluding anyone who is taxed as self-employed.
The policy premiums are paid for by the company and are written into a discretionary trust which will pay out a lump sum to the individual or their beneficiaries if they die while employed.
Some policy providers will also pay out if the individual is diagnosed with a terminal illness during the policy term.
As premiums are paid for by the company, in most cases payments are viewed as an allowable business expense by HMRC (see EIM15045), resulting in a tax saving.
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 as a benefit-in-kind so you won’t have to pay any income tax or National Insurance on the premiums.
This can represent significant savings over the life of the policy, especially for those higher rate taxpayers.
Tax efficient for the company and beneficiaries
Provided HMRC considers the insurance premiums as wholly and exclusively for the purpose of trade, they are regarded as part of the employee’s remuneration package which as well as cash includes other benefits, such as death-in-service or pension.
- The company can claim the cost against its Corporation Tax bill @ 19%, as 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 will result in a massive 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.
- Also, any pay-out will not count towards the employee’s lifetime pension allowance so the beneficiaries will not be required to pay tax when they make a claim on the employee’s policy.
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%. 2023/4 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 (pay-outs apply up to age 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.
- 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?
You can take out cover for up to 30 x your annual salary, although this 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 pay-out is likely to be up to 25 x your salary; for those aged 60 and above, it will be up to 15 x 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 will have to be created, with the new employer becoming a trustee.
The policy can also be transferred into 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.
