Is your Life Relevant? (Let the taxman help pay for your life insurance)
Life Insurance – now there’s a sexy subject! It’s right up there with all of the other really important stuff (sorted your will out yet?). OK, for those of you who are still awake, pay attention…this could save you a load of cash!
As a small business owner, there seems to be a great way to buy life insurance for yourself and your Key employees.
If you and/or your key employees have life insurance in place to protect your loved ones, you could be paying an unnecessary tax penalty. If you pay for 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 probably be taxed on the payment as if it were income.
Larger companies can avoid this by introducing ‘group death in service cover’, a tax- efficient way of providing life insurance, but is not generally available for smaller companies.
However, changes in legislation now allow small companies to benefit from this arrangement by taking out a ‘relevant life policy’. These policies can be written on an individual basis so are available to all companies no matter how small.
With a relevant life plan, the business pays the insurance premiums, not the person who is covered. So what? Well it means that it’s tax efficient for the business, because the payments are normally tax deductible.
It’s also tax efficient for the people being covered because the taxman doesn’t consider the payments a benefit in kind. So it could become a really affordable benefit of significant value to you and your key staff…It’ll make you look great AND it’ll save a bucket of cash.
That all sounds great, but it’s kinda difficult to get your head around, so here’s an example of how it could work:
- – If you run your own company and you pay £1000 per year for a life policy from your own post tax income, it’s probably costing you more than it really should.
- – If you’re a 40% taxpayer, there’s income tax(£690)
- – Then there’s employee National Insurance contribution (£34)
- – Then there’s employers National Insurance contribution (£238),
- – But you do get corporation tax relief (-£392)
- – So the net cost to your company is £1570
- – If you pay £1000 per year for a Relevant Life Plan.
- – You won’t pay any National Insurance Contributions
- – You won’t pay any income tax on the premiums
- – You DO get Corporation tax relief (-£200)
- – So the net cost to your company is £800So in that quick example, the net saving is £770. Now I don’t know about you, but saving 49% for the same cover seems pretty attractive. If you’re a basic rate tax payer the saving is still around 36%.I can’t cover all of the relevant (can you see what I did there?) stuff here, as it’s a bit of a technical subject and we’d need some time to go through everything! So here’s a few bullets which may help in the meantime:
- – This is not business protection (that’s a whole different subject) – the proceeds of any relevant life plan have to be used to benefit the employee and their family.
- – These plans are aimed at small companies that don’t have enough employees to warrant a group life scheme (normally about 6 employees).
- – You could use them as a “perk” for employees (big company benefits even though you’re a small company, attracting and retaining the best talent).
- – The plans will be written in trust, so usually avoid inheritance tax.So there you have it – Is your life “relevant”…or could it be? As I say, if you’re interested in this stuff, get yourself over to www.epolicy.co.uk and take a look – there’s a video there and a factsheet to download to give you a bit more info.