If you are looking to buy life insurance you may be interested to know that relevant life insurance plans can be arranged through your business or employer, attracting significant tax savings. Unsurprisingly, they are very attractive to company directors but also to high earning employees who qualify for tax relief. Of course, tax avoidance should not be your primary driver but we all like to find ways to save where we can. Relevant life insurance offers employers a way to provide life insurance for employees - a common perk with most remuneration packages nowadays.
Here we will explore how relevant life plans work, the tax benefits and who qualifies.
What is Relevant Life Insurance?
Introduced in 2008, relevant life insurance is a tax-efficient product that allows businesses to arrange life insurance policies for their employees. Relevant life insurance covers the employee's life and in the event that they die during the term, the policy pays out through a discretionary trust to the beneficiaries of the person insured.
The business pays for the life insurance but does not and cannot receive the benefits from the policy if a claim is made. The cost of the policy is considered a business expense and can be treated as such. From the point of view of the employee, the cost of the policy does not constitute a P11D benefit-in-kind.
Relevant Life Insurance key points:
- It is available to employees between the age of 17 and 74
- Must end by the time the employee reaches age 75
- Will pay a lump sum that can remain level or increase with inflation during its term
- Can only be arranged for the employee and spouses/partners cannot be added
- Cannot accumulate any value other than in the event of a death claim
- Cannot contain Critical Illness benefits
Which Taxes Can You Save by arranging Relevant Life Insurance?
Below, I have listed the various areas where tax savings are possible along with a brief explanation. However, in matters of tax, it is always important to ensure that you take advice from a specialist business insurance adviser* who will apply these to your specific circumstances.
- Corporation Tax - the cost of the relevant life insurance plan can be offset against profits thereby reducing corporation tax for the business.
- Income Tax - there is no P11D benefit-in-kind consideration so the employee would not be required to pay tax in the way that they would do for benefits like a company car or private medical insurance. Also, it is worth considering that in order to fund their own life insurance, an employee would need to pay the premiums from their net pay (after tax and national insurance has been deducted).
- National Insurance - there is no national insurance contribution required from the employer or the employee against the cost of the policy.
- Inheritance Tax - a discretionary trust arranged alongside the policy ensures that the money from a claim is paid through the trustees to the beneficiaries. This prevents the money from adding to the deceased employee's estate for inheritance tax purposes.
- Pension Lifetime Allowance Charge - for anyone who breaches this allowance (£1,073,100 in the tax year 20/21) there is a charge of 55% against the excess. In the event that the employee should die before the policy ends, the money from the relevant life insurance will not add to the funds assessed for this allowance. This is particularly significant because other death in service benefits that are not arranged this way would do the opposite, potentially meaning that 55% of the funds would end up being used to pay the charge.
If you are a higher earner (or someone who is likely to breach the Pension Lifetime Allowance (£1,073,100 in 2021/22) you should take a look at any death-in-service benefits that you have. If they are arranged through a group life insurance scheme then the money from a death claim will be added to your pension fund. If together, the pension fund and life insurance payout exceed the threshold, there coukd be a 55% charge on the excess. In contrast, the payout from a relevant life insurance policy would not add to your pension fund, thus avoiding the charge.
Relevant life insurance plans are an alternative to group life insurance which usually requires a minimum number of members and can be expensive for the business to set up and administer. For high earners, there is the added advantage that a relevant life policy does not form part of a registered scheme putting it outside the remits of your pension lifetime allowance. Again, this potentially saves on tax.
Qualifying for Relevant Life Insurance
Relevant life policies are available for most people who are salaried and taxed under Schedule E. The policy must be applied for by the business that will pay for it. An employer/employee relationship must exist between the business and the employee. Any death claim cannot benefit the business.
The types of organisations that can arrange a relevant life plan:
- Limited Companies
- Any other organisation within which an employer/employee relationship exists
Qualification criteria for a Relevant Life Insurance policy
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A relevant life insurance policy is particularly attractive for small to medium sized businesses who may find group insurance schemes expensive or inaccessible due to being unable to meet the minimum number requirements.
A relevant life policy is particularly attractive to directors of small to medium sized businesses who wish to arrange life insurance that is paid for by the business. There can be significant tax savings achieved through not using net income to pay for your life insurance as well as the corporation tax savings that the business would see.
How to arrange the best and cheapest Relevant Life Insurance
There are a number of considerations when arranging relevant life insurance. Due to local tax office differences, it is vital that you engage with a specialist who will guide you. Although the rules and tax savings described above are correct, there may be considerations that need to be checked with your local tax office. Many of the life insurance companies that sell relevant life insurance provide excellent assistance with this, but will not actually be able to provide advice to you.
We have vetted the services of a company that specialises in business insurance advice* and employs advisers who are specially trained in this area. One of its advisers will ask for all the necessary details before evaluating the best product, insurance company and rates for you. The adviser will take care of all necessary paperwork including the application form and trust completion. This will provide you with peace of mind and ease in arranging what you need.
If for any reason, a relevant life insurance plan is not right for you, the adviser will be in a position to access a more suitable product and recommend this instead. The advisers work with all life insurance products, both business and personal as well as all insurance companies in the market. This means you'll have access to every proposition that is available.
To arrange a callback from an adviser, complete this form*. Additionally, ss a Money to the Masses reader you'll even receive £50 cashback for arranging your insurance.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch