Having covered a whole host of facets concerning Life Insurance in the past few blogs, here’s where we start to get into the nitty gritty. And this is also the same point that we start to demonstrate a little of the magic of Independent Financial Advisors (IFAs). Intrigued? Good! Because if you’re one of the thousands of people that run a small business, then this article will definitely cause you to divert your eyes and attention our way.
Let’s start at the beginning. The most obvious way to obtain Life Insurance is for you to research it yourself and buy it, or to speak to an IFA, who can give you expert advice to help you choose the right package for you and your circumstances, and they’ll buy it on your behalf.
But, if you run your own company, then taking out a Relevant Life Insurance Policy is a different possibility.
What is Relevant Life Insurance?
It’s a bit of an odd name, but it functions in essentially the same way as two of the other types of Life Insurance we’ve covered in the past few blogs – level term and decreasing. Essentially, you pay premiums each month, and the Insurance pays out a lump-sum if the covered person dies within a specific period.
However, the difference here is that the policy is paid for by the business, which means it could be a tax efficient way of providing valuable life cover for your employees, or for yourself as a company director.
The benefits of Relevant Life Insurance
Why’s it tax efficient? Well, as the company pays the policy premiums, they are usually considered an allowable deduction and are not treated as a benefit in kind. That then sparks a big list of benefits which suddenly make it very interesting indeed:
- The policy premiums are treated as a business expense and are likely to be an allowable deduction against Corporation Tax
- The policy premiums do not form part of an individual’s annual allowance for pension contributions
- The Life Cover benefits do not form part of an individual’s lifetime allowance for pension savings (find out more about Pensions in our free guide)
- There is no liability for the employer or employee to National Insurance on the policy premiums
- There is no liability for the employee/you, to Income Tax on the policy premiums
- Life cover benefits are paid tax free to the nominated beneficiaries.
It’s a good list isn’t it? If you’re a business owner and are thinking about taking out Life Insurance, it would be worthwhile looking at this approach. Of course, as we’re talking about tax, there are some further things to consider. The most obvious being that tax treatment depends on your individual circumstances, and it may change in the future. You only have to look at how income tax or pension regulations have changed over the years to know that the way tax is collected is always evolving.
There are also a few other restrictions to take note of, such as the fact that Critical Illness cover can’t be added, and there’s a limit to the amount of Life Cover you can take out based on your salary, any dividends and other benefits. As always, it’s not cut and dried, so it’s worth taking some advice.
Now, while we’re talking about a nice, tax efficient way of purchasing Life Insurance, we haven’t actually been talking about what happens when you die (with regards to a payout, rather than any existential conundrums).
An important consideration here is that any Life Cover paid out from a regular company death-in-service scheme will be included as part of your lifetime allowance at that time. If these benefits are paid out as a lump sum and they take you over the current lifetime allowance threshold of £1.5m (tax year 2013/14), a tax charge of 55 per cent may be applied to the excess.
And here’s where we find another feather in the Life-Insurance-through-your-own-company’s cap. The benefits of a Relevant Life Policy don’t form part of your lifetime allowance, which means taking out death in service benefits through a Relevant Life Policy are likely to be more tax efficient.
Overall, there could be some serious savings to be had by choosing a Relevant Life Policy, but with so many factors in play, it’s worth seeking advice. Want a hot tip? Ask your IFA (or us!) to make a comparison between paying for Life Cover personally versus through your company. You may find that it’s a very significant difference.
This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
GreenSky Wealth Limited is authorised and regulated by the Financial Conduct Authority. FCA No. 629624. Registered Office as above. Registered in England and Wales, Company No. 07103441. The Financial Conduct Authority does not regulate Tax Advice or Estate Planning.