It isn’t common knowledge that a specific type of life insurance cover, called Relevant Life insurance, is deductible for tax relief within the framework of a limited company. However, it is a valuable piece of advice, as savings of up to 52% can be made by switching policy.
What is Relevant Life insurance?
Relevant Life insurance is essentially the same as regular Life insurance with regards to the protection it offers for you and your family. It pays a one-off lump sum benefit to a named beneficiary, if the person covered dies within the specified period.
Policies are either level-term or decreasing-term, which relates to if the insurance premiums remain static or decrease throughout the term of the contract.
There is one main difference between Relevant Life insurance and regular Life insurance, and that is that it can be funded through your business, which incidentally opens up a number of excellent tax opportunities.
Insurance premiums are tax deductible through a company
Because this insurance is paid for by the business, Relevant Life cover premiums are fully tax deductible as a business expense. National Insurance also doesn’t apply when the policy is within your company.
This means if you are a higher rate taxpayer, you can effectively save up to 52% with Relevant Life compared to a regular policy, and if you are a basic rate tax payer you can save up to 36%.
Over 25 years with a premium of £50 per month, switching to a Relevant Life Cover policy could save you over £7,800 as a higher-rate taxpayer.
In addition, this type of life cover is not treated as a P11D benefit in kind for the employee, i.e. you, so really it is a win-win for company directors who choose to take this route.
Any payout is also tax-free
So you may be thinking where is the catch, the benefit pay-out must be taxed. However, this is not the case.
The insurance cover will be written under a specialist “relevant life trust”, which ensures that a claim is paid promptly to the beneficiary and that this remains outside of your estate for the purposes of Inheritance Tax.
Only death is covered
Life insurance only covers in the event of death. Being diagnosed with a critical illness, or needing to protect your income in the event of being unable to work, are not part of this type of policy. These would need to be arranged separately.
Relevant Life cover is restricted to insure 15 times your total remuneration, including salary, dividends and P11D benefits. Whilst there is a restriction, almost all people will find this level more than adequate to meet their needs.
The only other criteria is that cover ceases at age 75.
Key Points of Relevant Life insurance
- Instead of paying your life cover from personal taxed income, your business will pay the insurance premiums, and claim tax relief
- The Relevant Life policy is written in trust, therefore it doesn’t affect your family in terms of Inheritance tax.
- Premiums paid by the company are not classified as a benefit in kind for the employee either, or subject to National Insurance.
To arrange Relevant Life insurance it is best to speak to a specialist financial adviser as premiums vary significantly across the market.