Death is inevitable, taxes can often be managed to some extent. Using relevant life policies instead of life insurance can be an astute way to help those who are left behind after a bereavement without incurring a hefty tax burden.
Relevant Life policies versus Life Insurance – the basics
A Relevant Life policy can only be taken out by a company on behalf of one of its employees (including directors). Relevant Life policies work on a similar basis to Life Insurance policies, however, if they meet certain, specific criteria, they are an allowable business expense, meaning that they can be set against profits for the purposes of calculating Corporation Tax. This fact can significantly lower the tax burden on both the employer and the employee.
Criteria to qualify as a business expense
At current time 2019/2020 these are the main criteria for relevant life cover to qualify as a business expense. It is strongly advisable to double-check that a policy complies with them before purchasing it.
The policy must only provide a lump sum benefit on death (or diagnosis of terminal illness) payable before the age of 75. It must not include any element of critical illness cover or have any surrender value.
The policy must only benefit an individual (or a trust set up on behalf of an individual) or a charity.
The main purpose of the policy should not be for the avoidance of tax.
Tax treatment of qualifying relevant life plans
While it is important to note that the use of Relevant Life plans should not be mainly for the avoidance of tax, they can offer significant tax benefits for both employer and employee.
From an employer’s perspective, they can be set against profits for the calculation of Corporation Tax (provided that the premiums are wholly and exclusively for the purposes of the business) and as they are business expenses rather than employee benefits, they are also ignored for the purposes of calculating the employer’s National Insurance contributions.
From an employee’s perspective, the fact that the policy payments are business expenses rather than benefits not only means that they are ignored for the purposes of calculating income tax and national insurance, but it also means that they are ignored for the purposes of calculating annual and/or lifetime pensions allowances.
To put this another way, if a company buys Relevant Life policies for its employees, let’s say at £200 each, they can set this cost against profits, thus reducing their Corporation Tax bill by £38 per employee (Corporation Tax is currently set at 19%). In other words, the effective cost of the cover would be £162 per employee.
If an employee buys a Life Insurance policy at £200, they have to pay for this out of their post-tax income. What this means in practice will depend on the employee’s salary, but assuming a 40% Income Tax rate and a 2% National Insurance rate, the actual cost of the cover would be £344.83. In other words, the insurer would get £200 (minus tax) and the government would get £144.83. The differential would be even greater for employees on higher tax bands, such as directors.
A quick note about other death-related insurance
Relevant Life policies are for the benefit of the employee’s loved ones rather than the business. If, however, the employee in question is key to the continued success of the business, then it may be worth taking out Key Person insurance for them. If they are a shareholder, you may also want to look at Shareholder Protection Insurance, which could make it easier for the company to buy the shares from the beneficiaries of the deceased’s estate.
For Tax planning, we act as introducers only.