RELEVANT LIFE INSURANCE
An extremely tax efficient death in service benefit businesses can provide for individual employees, including directors.
Tax deductible life insurance for employees and directors
Relevant Life Plans are an extremely tax efficient life insurance policy that a business can provide for individual employees, including directors. They are single life, specific death in service arrangements, held in trust and provided by a business for the benefit of the employee or directors family, much in the same way a regular life insurance policy does. The product is extremely tax efficient.
For companies. monthly premiums can receive corporate tax relief of up to 25% and attract no employer National Insurance cost. No benefit in kind (P11D) is incurred, saving employees income tax at their highest rate. Company directors can make significant savings, typically up to 50%, by allowing the company to pay for their life insurance through this type of product.
Depending on an individual's rate of tax and a company's rate of corporation tax (even after maximising tax efficiencies via dividend payments), some individuals will enjoy savings of up to 66% compared to paying for life insurance from post tax income.
For other businesses, premiums are usually an allowable business expense, and again, no national insurance or benefit in kind costs are levied on either the business or employee.
Relevant Life Plans became available in 2006 under the pension simplification legislation as a way for business owners to provide tax efficient life cover for employees and directors. It is often provided as a valuable employee benefit by employers who cannot access group scheme coverage available to many large businesses. As a product, it’s about as tax efficient as they come and often used to retain and attract the very best employees. For company directors, it's hugely beneficial, given the generous sums assured available.
HOW DOES IT WORK?
The employer/ business takes out the plan on the life of an employee or director. The plan can be written to a maximum age of 75 and can contain flexible continuation options should an employee or director leave employment.
Generous sums assured are available (subject to criteria) and the plan is set up from outset in a specific discretionary trust, called a Relevant Life Plan Trust.
This ensures the proceeds do not fall into the estate of the deceased, thereby ensuring much quicker access to funds and also ensures the proceeds are paid free of Tax.
TAX EFFICIENT
TAX DEDUCTIBLE
TAX FREE
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RELEVANT LIFE PLAN
VERSUS
A PERSONAL LIFE POLICY
Tom is a 40 year old company director (business owner) and is considering life insurance through the business as opposed to buying it personally.
He has a quote for both personal life cover and relevant life cover. Both products are for £1 million to provide much needed protection for his family and are for the same term, ending at age 75.
The cost of the premiums for each of these plans are identical, as we would expect from most providers. So which does Tom select? They both look like the same benefit for the same premium. And they are.
Relevant Life Plans are not cheaper than personal cover. In fact, they're usually the same cost. The savings are made simply by having the right type of policy in place which qualifies for the beneficial tax treatment.
The following tables demonstrate the difference in tax treatment between a personal life insurance policy and a qualifying relevant life policy. Tom can choose to pay for his own policy from post tax income, or he can elect that his business provides the valuable cover he requires. In this example the company corporation tax rate is 20%.
Personal Life Policy
ANNUAL PREMIUM
Gross earnings Required
to pay premium
Employee National Insurance Paid (2%)
Employee Income Tax Paid (40%)
£1000.00
£1724.14
£34.48
£689.66
Employee net pay (£1000)
Employer National Insurance Paid (13.8%)
Corporation Tax Relief Granted (20%)
£237.93
-£392.41
Net Cost to Tom
£1569.66
Relevant Life Policy
ANNUAL PREMIUM
Gross earnings Required
to pay premium
Employee National Insurance Paid
Employee Income Tax Paid
Employer National Insurance Paid
Corporation Tax Relief Granted (20%)
Net Cost to Tom
£1000.00
N/A
N/A
N/A
N/A
-£200.00
£800.00
If Tom selects this option he is £769.66 per year better off compared to the personal plan shown, equivalent to a saving of 49%. The total amount Tom can save over the term of the policy is almost £27000!
Tax Efficient
In this example Tom is a higher rate tax payer. If Tom was a basic rate taxpayer the savings could still be as much as 40%. Based on current tax legislation 2023/24 tax year.
There can be significant differences in cost depending on how one arranges life insurance. If you'd like to see how much you can save, get in touch below.
Lets have a closer look at the tax
BREAKDOWN OF HOW THE COSTS DIFFER
Personal Life Insurance
£1 million
Relevant Life Plan
£1million
Annual Premiums
£1,000
£1,000
Employee deductions from gross earnings
to receive
net premium equivalent of £1000
(40% tax rate )
Employee National Insurance contribution
(assuming 2%)
£34.48
Employee Income Tax
(assuming 40%)
£689.65
Employer costs and reliefs to provide net pay equivalent to premium.
Corporation tax rate 20%
Employer National Insurance contribution
(assuming 13.8%)
£237.93
Less corporation tax
(assuming 20%)
- £392.41
- £200
Total cost
£1,569.65
£800
FAQ's about Relevant Life Insurance
CAN YOU PUT LIFE INSURANCE THROUGH A LIMITED COMPANY?
Yes... But putting a life insurance plan through your company or business does not necessarily mean it escapes tax and national insurance charges with respect to both the business and the individual being insured. Only specific categories of life insurance or employee benefits receive favourable tax treatment and the rules are very strict.
One type of life insurance policy that can be put though the business and is tax deductible is a type of policy type called relevant life insurance, more commonly branded Relevant Life Plans. They are different than "normal" life insurance, sold to or bought by individuals.
For example, if you are a limited company director, you will be pleased to learn that rather than funding the costs of a life insurance policy from your personal or post-tax income, your company can fund a Relevant Life Plan (RLP) for you, which provides death-in-service benefits similar to those provided to employees by large companies via a group life scheme.
Your company can enjoy full corporation tax relief on premiums and no employer National Insurance costs whilst you can enjoy the beneficial cost of this arrangement with no benefit in kind charge. This has the effect of saving you tax and employee national insurance. Arranging your insurance in the most efficient way via an RLP can mean a difference in cost of up to 50% compared to paying for personal cover for higher rate tax payers and even more for additional rate tax payers.
Putting a personal life insurance plan through a company (the business pays the premiums on your behalf) means it will not qualify for the favourable tax treatment on offer and your company will incur corporation tax charges, employer national insurance, while you will be charged income tax on the benefit. It really has no benefits unless you use the correct qualifying product.
CAN YOU HAVE A JOINT RELEVANT LIFE PLAN?
Unlike personal life policies that are joint (owned and shared by two people) where the policy pays out on first death and then terminates, a relevant life policy can only include single life cover. You can however, have multiple life covers with different terms within the plan as long as they are all for the purpose of providing benefits for dependents. You cannot use the same plan for other key person or ownership protection benefits.
WHO CAN HAVE A RELEVANT LIFE POLICY
Any employee of a business, including directors and controlling directors. The business can be a limited company, a partnership, a Limited Liability Partnership, a charity or a sole trader. However you cannot get cover for sole traders, partners or equity members / partners themselves, where they are taxed under schedule D.
CAN A SOLE TRADER HAVE A RELEVANT LIFE POLICY?
A sole trader in their personal capacity as a business owner is not eligible to take out relevant life cover, as a sole trader is not a legal entity and cannot get a policy through the business. However, a sole trader business owner can apply for a policy on behalf of an employee. If you are a sole trader looking for life insurance options please get in touch.
"Relevant Life Cover allows employers to offer a death-in-service benefit to individual employees. It’s a tax-efficient, stand alone, single life insurance policy, set up and paid for by the employer. The proceeds are paid tax-free via a discretionary trust on death (or diagnosis of a terminal illness), for the benefit of employees' and directors' dependents".
If you're a Director who's paying for your life insurance from your personal income:
You could benefit by switching to a Relevant Life Insurance Plan provided by your limited company.
Key benefits
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Premiums paid by the company are treated as a business expense for tax purposes
-
The premiums paid are not treated as a benefit in kind or otherwise taxable on the life assured
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The premiums paid do not count as part of the employees annual allowance (for pension)
-
Premiums are not subject to employer or employee national insurance contributions
-
Any benefit payments are free of income tax
-
The death benefit does not form part of the your estate for IHT purposes
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The maximum amount of cover available is normally £10 million
Important information
Policies must be written under the appropriate discretionary trust.
The person covered must be a UK resident and an employee of a UK business.
There must be an employer/ employee relationship.
Although set up by the employer and paid for by the employer, the trustees will own and control the policy. The trustees will be the business owner(s), i.e. the employer.
A controlling director is treated as both an employee and employer.
Setting up cover
Many employers choose to set the amount of cover as a fixed sum or a multiple of salary.
Depending on age of the insured the maximum income multiple most providers allow is 25-30 times.
Please contact us for further information and discover how much benefit and tax savings you are entitled to.