How To Reduce The Cost Of Life Cover
Question:
- Are you a director of a small business and pay for your life cover premiums personally, out of net income?
- Are you an employer looking to provide ‘death in service’ benefits for your employees but there are too few to set up a group scheme?
If the answer to either of these questions is yes, the Relevant Life Trust will provide a tax efficient solution for you.
What is this relevant life trust plan?
It is a one man death in service policy which pays a tax free lump sum to your dependents on your death.
Who can take out this relevant life trust plan?
Company directors receiving income via PAYE and employees of a small company.
Who cannot take out this relevant life trust plan?
Sole traders, equity partners of a partnership, or equity members of a limited liability partnership.
How is this relevant life trust plan tax efficient?
The premiums are classed as a business expense, so are an allowable deduction for Corporation Tax purposes.
Paying the premiums via the company as opposed to a director paying them personally also makes the following savings:
| Life Cover Policy | Relevant Life Plan | |
|---|---|---|
| Annual Premium | £1,000.00 | £1,000.00 |
| Employee Tax: National Insurance – 2% | £34.48 | £0.00 |
| Employee Tax: Income Tax – 40% | £689.55 | £0.00 |
| Employer Tax: National Insurance – 13.8% | £237.93 | £0.00 |
| Employer Tax:Less corporation Tax | -£392.41 | -£200.00 |
| Total cost to the company & the director | £1,569.65 | £800.00 |
This example assumes the director is a 40% tax payer and is provided for illustrative purposes only.
The premiums and benefits do not count towards your annual or lifetime allowance.
The plan is in trust which is beneficial for Inheritance Tax purposes.
The plan is not a P11D benefit for the employee.
What are the limitations?
The plan covers life and terminal illness only. There is no option for critical illness.
The policy ends when the person covered leaves their current employer. However their new employer can opt to take over the plan, or the person covered can continue to pay the premiums but out of their net pay.
What other benefits are there?
The life assured can increase the level of cover without the need for further medical underwriting.
Tags: allowable deduction company directors corporation tax equity members group scheme income tax inheritance tax purposes insurance life trust limited liability partnership national insurance premiums tax terminal illness