There is a great new way to arrange life insurance in the UK which can open the door to significant savings and as we know every little bit helps at the moment. Under the new arrangements, for those who qualify, it can be possible to get the new life cover treated as a legitimate business expense.
So what are the possible savings? Firstly because your company will be paying the premiums and because they are an allowable business expense there is the potential for the company to obtain corporation tax relief. Secondly there is no Employer’s National Insurance due.
The first area of employee savings is a big one, Income Tax. A relevant life policy does not count as a benefit in kind, therefore if the company pays the premium there is no Income Tax to be paid by the employee in respect of the life cover contributions. Secondly the life company premiums do not give rise to Employee’s National Insurance.
This is good news for employers and employees alike and probably best news of all for those company directors who are both employer and employee at the same time.
For example the real gross cost up to now of a £200pm life cover premium to a 40% taxpayer after accounting for tax and employees and employee’s NI is a whopping £392.41pm which, after corporation tax relief nets down to £317.41pm.
Compare the above with setting up the same cover as a relevant life policy. The amount payable to the life company remains the same at £200pm, but this time there is no Income Tax or National Insurance contributions to add. After paying the premium the company claims corporation tax relief, which at 19% reduces the net cost to £162.00pm
By setting up the life insurance as a relevant life policy the total saving achieved for employee and company is 49%. All you need is a willing employer.
Its also worth mentioning one other group of people who stand to particularly benefit from relevant life policies and that is those who are close to the personal lifetime allowance limit. Traditional death in service scheme benefits are taken into account when calculating whether the personal lifetime allowance has been exceeded but relevant life policies are not included.
As usual there are a number of rules which need to be followed when setting up a relevant life policy. First of all relevant life policies are not available for the self employed, so if you are a sole trader or in a partnership you will not be allowed to have a relevant life policy (unless you also have non self employed earnings). Secondly the benefits of the life policy must be ‘reasonable’ in relation to the life assured’s income. Whilst this probably leaves room for the amount of cover to significantly exceed the ‘four times salary’ traditional death in service scheme maximum, which is another plus point, the amount of cover must still be ‘reasonable’. Also although income can include dividend income, it must not soley consist of dividend income (ie there must be some PAYE earnings).
Other key points to watch out for include a maximum age at the end of the policy of 75 and the plan must only provide life cover (no other benefits).
The policies have to be proposed by the limited company (the employer) on the life of the employee and written under trust for the life assured’s beneficiaries. Should one’s employment cease then the employer will have to cease paying premiums and cover will need to stop, unless (as would usually be preferable) the life assured takes over paying the premiums themselves.
Finally a couple of tips.
First if you are thinking about replacing life cover that you already hold with a relevant life policy, don’t stop your existing cover until you are in receipt of full acceptance terms from the new life insurer – the worst possible mistake would be to cancel existing cover that you already hold in anticipation of arranging more tax efficient cover only to find that the new insurer wont accept your application due to a health problem etc!
Secondly, at this moment the majority of life companies have yet to wake up to the potential cost savings that these policies offer so you’ll have to look around to find which companies are offering these policies or dare I say come to a company like Moneysworth who already know and can arrange the whole thing for you.