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Ask the Experts: Life Policies

Question: Should I take out a life policy?

Relevant Life Policies

Providing death in service benefits for your employees can inadvertently create potential tax problems for those high earners with substantial pension funds.

Taking out a Relevant Life Policy could be a tax efficient way of helping to provide the valuable life cover and financial security you want for your employees and for your family. These policies are designed for individual employees who may require:

More life cover than the main Company scheme provides or,
Where the number of employees is too low for a company group scheme.

The policy premiums are paid in a more tax efficient way by the company compared to employees paying for their life cover benefits personally. The good news is, company directors like yourself working day to day in a business on a Pay As You Earn (PAYE) basis, are likely to qualify for this arrangement whereby you could also take out life cover to help protect the financial security of your loved ones.

Why should I take out a Relevant Life Policy?

The plan is restricted to providing life cover only and cannot contain any waiver of payment, critical illness or income protection benefits and must cease before the life assureds 75th birth day.

Your company can pay the policy premiums usually as an allowable deduction without them being treated as a benefit in kind, which means:

As the employer, your policy premiums are treated as a business expense and are likely to be an allowable deduction against Corporation Tax
There is no liability for National Insurance for you or your employee
There is no Income Tax liability for your employee
The benefits are paid tax free to their nominated beneficiaries
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.

Tax treatment depends on your individual circumstances and may change in the future. You should discuss this with your financial adviser.

Looking at this in practice

Mr A is a shareholding director of ABC Ltd. He currently pays for his life assurance personally at a cost of £200 per month out of his net take home pay. As Mr A is also a business owner, we will look at both his personal and business costs and the effect of taxation of providing this cover.

Mr A is a higher rate taxpayer, he pays 40% Income Tax on the higher part of his salary. He also pays the additional 2% rate above the upper earnings limit for National Insurance. We have assumed the policy premiums for his plan are taken from his higher marginal rate of tax and have used these rates in our calculation. ABC Ltd pay employer’s National Insurance contributions at the ‘contracted in’ rate of 13.8%. In this example salary, National Insurance contributions and Relevant Life Policy premiums are all treated as allowable deductions for the purposes of Corporation Tax.

Mr A paying personally for life assurance

Monthly policy premium paid from his post tax income. = £200pm

Pre-tax income needed to fund £200 at Income Tax rate of 40% and employee National Insurance at 2% additional rate. =£344.83

Employer’s National Insurance contributions at 13.8% on this amount of salary paid by LBD Ltd. = £47.59

Total cost to ABC Ltd and Mr A = £392.41

Less Corporation Tax at 20% as an allowable deduction. Salary, Income Tax and National Insurance are allowable expenses against Corporation Tax.

Total cost to Mr A and ABC Ltd = £313.93

LBD Ltd paying for a Relevant Life Policy

Monthly policy premium paid by LBD Ltd.

= £200pm

No Income Tax, employee’s or employer’s

National Insurance payable. = £200