Explaining the tax efficiency of Relevant Life Insurance to Small Business clients

Accountants’ Guide to Relevant Life Cover

Explaining the Tax Benefits of Relevant Life Insurance to Small Business Clients

Relevant Life Insurance is a type of life cover that is owned and paid for by a business. Many small business owners could benefit from the tax efficiencies this cover can provide.

Here we look at Relevant Life Cover in more detail and specifically how it can help small business owners save money. Given that many small business owners haven’t heard of Relevant Life cover, just mentioning it represents another opportunity for accountants to add value for their clients.

Tom Conner
Director at Drewberry

 

Who Benefits from Relevant Life Insurance?

Relevant Life Cover can be a very tax-efficient method of providing Life Insurance for:

  • Directors of small companies who otherwise would need to use their personal income to pay for life cover
  • High earning employees who are looking to avoid the potential of their death-in-service benefits becoming part of their lifetime allowance for pension purposes
  • Small businesses who want to offer cover to a single employee.

In practical terms, Relevant Life cover proves very popular with the owners of small businesses where the company doesn’t have a Group Life Insurance Scheme. As one example, we have specifically seen an increased uptake with contractors who operate through their own limited companies.

Excellent service renewing our medical insurance, professional advice, good rates found and excellent professional after service, highly recommended.

Kevin Paul
05/09/2017
 

Why is Relevant Life Cover So Tax-Efficient?

Small businesses often don’t have the number of employees needed for a Group Life Insurance Scheme, which means they can potentially miss out on some of the tax-efficient benefits of having Life Insurance paid for by the company.

Calculate the reduced cost of Life Insurance you could achieve with Relevant Life Insurance today

Relevant Life Cover addresses this barrier by allowing smaller businesses to offer Life Insurance for a single employee, with tax benefits similar to that of a Group Scheme.

Naturally that single employee could be the owner of the business, and more than one policy can be taken out to cover more than one owner.

As premiums for Relevant Life Cover are paid through the client’s business, any benefit paid out:

  • Will normally be free of income tax, National Insurance contributions and capital gains tax
  • As a ‘non-registered’ scheme, benefits won’t usually count towards the employee’s lifetime pension allowance
  • Won’t usually be included in the employee’s estate for IHT purposes as the benefits are held in trust.

What’s more, the premiums will:

  • Usually be treated as an allowable expense for corporation tax purposes
  • Neither the employer nor employee has to pay National Insurance contributions on the premiums
  • Not constitute a P11D benefit.
 

How Much Can Small Business Owners Save with Relevant Life Insurance?

The actual amount of the saving over personal cover will depend on the employee’s/business owners marginal rate of income/dividend tax.

Take John, a company director who pays himself a dividend…

John remunerates himself via a basic salary up to the National Insurance threshold and pays the remainder in dividends. John plans to take out life cover with a monthly premium of £100.

Factoring in both corporation tax (at 19%) and dividend tax (at the higher marginal rate of 32.5%), if John was paying for the cover from his personal income (i.e. dividends) the business would need to generate a profit before tax of £182.90 to fund his premium.

If the business pays for a Relevant Life policy it means there are no associated costs to personal income. This means the effective cost for £100 per month worth of cover once Corporation Tax relief has been applied would be £81.00 per month.

By opting for Relevant Life Cover, John is effectively saving a total of £101.90 per month which is £1,222.80 per annum, and represents a 55.7% reduction in total cost.

relevant life savings from income

Sally, another company director and higher-rate taxpayer

Sally was looking to pay for Life Insurance out of PAYE earnings. Sally pays a 40% marginal rate of income tax and pays 2% in National Insurance contributions. She’s looking to buy £100 of life cover out of her own pocket.

Factoring in income tax and both employee and employer National Insurance contributions, if Sally were to pay for cover from her personal income the gross cost to the business to fund the premium would be £196.21 per month.

However, with corporation tax relief this falls to £158.93 per month.

As the business pays for the Relevant Life policy it means there are no associated costs to personal income, which means the effective cost for £100 per month worth of cover once Corporation Tax relief has been applied would be £81.00 per month.

By opting for Relevant Life Cover, Sally is saving a total of £77.93 per month which is £935.16 per annum, and represents a 49% effective saving.

Despite the significant savings Relevant Life cover can provide for company directors, research from Legal & General has found that 63% of directors had never heard of this type of cover.

To try and address this, Drewberry has developed and recently launched a Relevant Life Insurance Calculator as per below which demonstrates the potential savings for clients covering both traditional employees and Company Directors receiving dividends.

Victoria Slade
Business Protection Expert at Drewberry

 

Relevant Life Insurance Calculator

Calculate the tax savings you can make by choosing to take out Relevant Life Insurance and have your business pay the premiums instead of setting up a personal Life Insurance policy.
1
Your Monthly Premium
£
2
Is the premium paid from dividends ?
3
Your Highest Rate of Income Tax Your Highest Rate of Dividend Tax

Some assumptions have been made as to the relevant tax rates, please update accordingly if you are taxed at an alternative rate.

Corporation Tax Rate
Employer National Insurance Rate
Employee National Insurance Rate
4
Your First Name
5
Email Address Enter your email address for your summary report and our exclusive 'Directors guide to tax efficient insurance products' e-guide.

Your Relevant Life Tax Savings

Personal Life Cover
Relevant Life Cover
Cost to Individual
Premium
£0.00
Employee National Insurance
£0.00
IncomeDividend Tax
£0.00
Cost to Business
Premium
£0.00
Employer National Insurance
£0.00
Gross Cost
Corporation Tax Relief
Total Cost

By opting for Relevant Life Insurance over Personal Life Cover you would make savings of .

That is a saving of per month or per year.

victoriasladeportraitround

These calculators help but sometimes it doesn't beat talking to a human. If you need any support please do not hesitate to pop us a call on 01273646484.

Victoria Slade
Business Protection Expert at Drewberry

IMPORTANT NOTES

The tax treatment of Relevant Life Cover is based on the policy being wholly and exclusively for the purpose of trade. Cover can be offered to an employee as part of that employee’s remuneration package, which is competitive relative to what they could attract in the open market. The purpose of providing such a scheme must not be primarily to avoid tax.

Speaking to an expert adviser is highly recommended before entering into this type of arrangement to ensure the plan is set up correctly and you aren't falling foul of any tax rules. The team at Drewberry is here to help – just pop us a call on 01273646484.

Relevant Life Insurance Quote Engine

The Simplest Way to Compare Relevant Life Cover

Drewberry Launch Online Relevant Life Quote Engine

Drewberry helps hundreds of small businesses form across the UK every year arrange protection plans such as Relevant Life Cover, Key Person Insurance and Shareholder Protection Insurance, and provides advice on pensions and investments. We aim to provide a five-star service and 99% of clients would recommend us.

Drewberry is currently the only website in the UK where clients can compare online quotes across all major insurers for Relevant Life Insurance and Key Person Insurance.

 

Partner with Drewberry

We thought the traditional way of introducing a client was a little antiquated and lacked transparency, send your partner an email and hope for the best! We like to do things properly and we wanted to make this experience better.

So we built our partnership portal, you can log in to your portal and have complete information on the clients you have introduced and know they are being dealt with in a professional manner. You can click here to demo our partnership portal →

We currently work in partnership with a number of professional businesses including accountancy firms who engage with their clients regarding business protection insurance.

If you would like to discuss in more detail how we can help your small business clients, please contact me on 07714980112 or email tomconner@drewberryinsurance.co.uk.

Tom Conner
Director at Drewberry

Risk Warning

The tax treatment of Relevant Life Cover is based on the policy being wholly and exclusively for the purpose of trade. Cover can be offered to an employee as part of that employee’s remuneration package, which is competitive relative to what they could attract in the open market. The purpose of providing such a scheme must not be primarily to avoid tax.

Other Useful Guides

Relevant Life Insurance could save Company Directors 50% on premiums!

Join our Partnership Portal...

Drewberry's Online Relevant Life Insurance Quote Engine for UK Small Businesses