How Do I Value A Key Employee for Key Person Insurance Cover?
Question asked by Kate Webster
I’m a Company Director needing Life Insurance. I spoke to an old colleague and they suggested Relevant Life Insurance paid for by my limited company.
I was just wondering how HMRC taxes Relevant Life Insurance as I don’t want to set up a policy that creates tax issues!
As you say, you run Relevant Life Insurance through your limited company. This means your business owns the policy and pays the premiums, even though it’s underwritten on your life.
With Relevant Life Insurance paid for from company funds, it’s similar to, and often replicates, a Death In Service scheme. However, instead of covering a whole group of employees, it protects you as a sole individual.
Check out the table below for an example of the tax savings an individual can make with Relevant Life Insurance.
|
Personal Life Cover
|
Relevant Life Cover
|
|
|---|---|---|
|
Cost to Individual
|
||
|
Monthly Premium
|
£100.00
|
£0.00
|
|
Employee NI Contribution
|
£3.45
|
£0.00
|
|
Income Tax
|
£68.97
|
£0.00
|
|
Cost to Business
|
||
|
Premium
|
£0.00
|
£100.00
|
|
Employer NI Contributions
|
£23.79
|
£0.00
|
|
Gross Cost
|
£196.21
|
£100.000
|
|
Corporation Tax
|
-£37.28
|
-£19.00
|
|
Total Cost
|
£158.93
|
£81.00
|
|
Total Savings
|
49.03% |
|
As you can see, premiums are eligible for corporation tax relief. As it is paid for directly by the business there is also no income tax and National Insurance to worry about.
Moreover, HMRC does not treat Relevant Life Insurance as a P11D or benefit in kind, meaning there’s no additional tax to pay despite the business paying premiums on your behalf.
IMPORTANT NOTICE! 🧐
To qualify for tax relief the policy must be wholly and exclusively for the benefit of the business and not seen to be solely to avoid tax. Check with your accountant and your local inspectorate of taxes on this.
The benefit is also paid tax-free. This is because, when you set up a Relevant Life policy, you write the policy into trust to keep it separate from both your business and your estate.
Keeping it separate from your business means there are no tax complications if you pass away because the money doesn’t go back into your company.
Holding the money outside your estate, meanwhile, means your estate isn’t liable for inheritance tax on the payout. Your loved ones can therefore get access to it faster, without having to go through probate.