Relevant life cover is a tax-efficient way of protecting your family via your own limited company.
Read on to find out more about the many benefits for company directors.
This type of protection is similar to a ‘death in service’ policy often provided to traditional employees.
A Relevant Life Policy (RLP) is a tax-efficient way to provide a cash sum to employees of private limited companies (such as contractors) should they die.
The policy is paid for by your limited company, written in trust, and the premiums are an allowable business expense.
It is particularly attractive to small company owners who don’t have the resources or the need to set up a group life scheme.
Here are 8 essential facts you should know about Relevant Life insurance.
For an even deeper insight into relevant life cover, read our comprehensive FAQ for company owners.
Relevant life premiums are paid by your limited company – and offset against the company’s Corporation Tax bill.
On the other hand, standard life insurance policy premiums are paid for out of your post-tax personal income.
As a result, a relevant life policy can result in savings of up to 50% (higher rate taxpayer).
The premiums are a legitimate business expense as long as the benefit is provided “wholly and exclusively for the purposes of the trade.”
This golden rule – which applies to all expenses – is contained in the UK Income Tax (Trading and Other Income) Act 2005, Section 34.
In this case – the policy protects the company against the financial loss from the death of a key employee. So it is a legitimate business expense.
Following the April 2023 hike in Corporation Tax, any costs you can legitimately offset against your company’s tax bill are even more valuable than ever.
The effective CT rate on profits between £50,000 and £250,000 is 26.5% for the 2024/5 tax year!
Benefits-in-Kind (BIK) are benefits that employees or directors receive from their employment in addition to their salary.
You do not need to declare the insurance policy premiums on your annual P11D form, as they are not deemed to be a ‘benefit in kind’.
Therefore, the employee (contractor) does not pay additional income tax on the value of the premiums.
Similarily, the limited company does not pay employers’ NICs of 13.8% on the value of the benefit.
A RLP can cover employees of many small businesses, including directors, such as limited companies. However, some business types are not eligible, such as sole traders (see restrictions below).
There are three parties involved when a policy is written into trust.
The settlor is the person or organisation that establishes the trust—typically the employer. The settlor automatically becomes a trustee and is responsible for paying the premiums.
The trustees are the legal owners of the trust fund and are responsible for distributing the lump sum if a successful claim is made.
The settlor names the beneficiaries at the inception of the policy – usually the spouse or other family members.
In most cases, Inheritance Tax is not payable on any sums paid out by the insurer, as the cover is written in trust.
You can use the combined value of your salary and dividend draw-downs to work out the maximum amount you can insure your life for.
This will usually be 15 to 30 times your annual income.
Understandably, the maximum multiples of income available reduce with age.
So, a 30-year-old contractor may be able to secure cover of 30 times income, whereas a 60-year-old may have to settle for 15 times.
Should you decide to take out cover, but then move back to a permanent job, your RLP will typically be portable.
So your new employer can continue making payments to the same scheme.
For an RLP to meet all regulatory requirements, there are several restrictions you should be aware of.
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