Following changes to Group Life legislation; it is now possible to set up tax efficient life cover for single director / smaller companies. It can also be taken out on behalf of employees too.
Until the rules were changed directors of small companies have typically missed out on the benefits of having access to Group Life Insurance enjoyed by larger companies as many insurance companies wouldn’t allow a one person scheme and are unlikely to offer cover to companies with less than 5 employees.
What are relevant Life Policies?
- The policy provider a lump sum on death in service for the benefit of directors or employees dependents
- The premiums are paid for by the company
Who is allowed to have one?
- Any director, or employee of a limited company, partnership, charity or sole trader
- Sole traders themselves or equity partners cannot be covered – in other words anyone taxed under schedule D for income tax purposes unless they have schedule E earnings too
Why are they tax efficient?
- The taxman doesn’t treat the premiums as a P11d benefit in kind
- Neither the employee nor employer has to pay National Insurance (NI) contributions on the premiums
- The premiums can be treated as a tax deductible business expense thus reducing a company’s corporation tax liability – subject to approval from the local inspectors of taxes under ‘Wholly and exclusively’ rules
- Premiums don’t count towards an individual’s pension Annual Allowance (AA) for tax purposes
- Directors and employees don’t have to pay income tax on the lump sum death benefits
- The lump sum payment on death / terminal illness is not usually subject to Inheritance Tax (IHT)
- The lump sum payment on death / terminal illness doesn’t form part of an individual’s pension lifetime allowance (LTA)
In summary, it is possible to create tax savings of 49% on the premium cost when using a Relevant Life policy compared with ordinary life policy.
If you are interested in the potential tax savings of a Relevant Life Policy and would like to know more please contact me via IBrookes@critchleys-fp.co.uk
Find out more about Ian Brookes