The following blog has been kindly provided for us by Jerime Attah of St Jame’s Place Wealth Management.
Are you a company director? Do you have life insurance in place to protect your family?
If so, you could be paying an unnecessary tax penalty. If you pay for this cover from your own bank account you will be paying from post-tax income, and if you are paying from the business account you will most likely be taxed on the payment as if it were income.
Larger companies can avoid this by introducing ‘group death in service cover’. This is a highly tax-efficient way of providing life insurance, but is not generally available for smaller companies.
However, changes in legislation have allowed smaller companies to benefit from arrangements known as ‘relevant life plans’. These can be written on an individual basis so are available to all companies no matter how small.
Relevant life plans are particularly suitable for businesses that do not have enough eligible employees to warrant a group life scheme and for high earning employees and directors who have substantial pension funds and do not want their death-in-service benefits to form part of their Lifetime Allowance.
The tax benefits are:
- Payments are made by the company with no benefit-in-kind charge back to you
- No National Insurance implications
- Possible tax relief as a business expense depending on your individual circumstances
- Tax-free benefits to your dependants
- Plan proceeds do not count towards Lifetime Allowance.
So, what is a Relevant Life Plan?
A Relevant Life Plan is a life assurance plan that provides death-in-service benefits for employees of a business. The plan itself is established and paid for by the company on the life of the employee or director. Any benefits from the plan are paid to a discretionary trust. The beneficiaries of the trust will be the family members and dependants of the life assured.
Who are they for?
Relevant Life Plans are particularly suitable for businesses that do not have enough eligible employees to warrant a group life scheme or high earning employees and directors who have substantial pension funds and do not want their death-in-service benefits to form part of their Lifetime Allowance. They can also be used by existing members of group life schemes who want to top-up their benefits but are limited in the amount that can be provided by their current scheme.
Relevant Life Plans have been designed for use by any employee, including the directors of a business. They are not available to Equity Partners of a Partnership, Equity Members of a Limited Liability Partnership, sole traders or anyone who is not an employee. Shareholders of a limited company who are not employees or paid directors are also ineligible for a Relevant Life Plan.
What are the benefits?
While the contributions will be paid for by the company, they will not be treated as a benefit in kind so will not be taxable on the life assured for whom the plan has been established. This can provide a significant tax saving, particularly for higher and additional rate tax payers. Furthermore, the contributions paid to fund the plan should be treated as an allowable business expense for the company. This will be dependent on how the arrangement is viewed by the local Inspector of Taxes as they will have to be satisfied it meets the wholly and exclusively rules. The following example compares the net cost to the employer of an employee taking out a personal life assurance plan (paid for by the employer) with that of a Relevant Life Plan also paid for by the employer, demonstrating the saving that could be achieved:
|Employee-owned plan||Relevant Life Plan|
|Employee Income Tax (20%)||£345|
|Employee’s NI contribution (12%)||£204|
|Employer’s NI contribution (13.8%)||£238|
|Gross Cost to Employer||£1,787||£1,000|
|Corporation Tax Relief||(£357)||(£200)|
|Net Cost to Employer||£1,430||£800|
The levels and bases of taxation and relief’s from taxation can change at any time and are dependent on individual circumstances.
A Relevant Life Plan only provides life cover and cannot provide other benefits such as income protection or critical illness insurance. The policy also has to be a term assurance policy as it cannot have a surrender value.
A lump sum is also only paid out if the employee is under the age of 75 when they die and the beneficiaries must be individuals or charities. Finally, the main purpose of the plan must not be to avoid tax.
To learn more about these tax-efficient life policies or receive a complimentary guide contact Jerime Attah on 0796 7731377 or email Jerime.Attah@sjpp.co.uk.