How Does HMRC Treat Relevant Life Insurance?

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 Relevant Life Insurance is taxed by HMRC as I don’t want to set up a policy that creates tax issues!

Question asked by Mr R Jones
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Answered by Michael Englefield

 

How is Relevant Life Insurance Taxed?

It’s a very good question. We’re often asked how Relevant Life Insurance is taxed. As you say, it’s run through your limited company, which means your business will own the policy and pay the premiums, even though it will be underwritten based on your life.

This can lead to some confusion because it’s different from the way a personal policy is set up. These are paid for outside the company using post-tax income.

A Relevant Life policy, however, is paid for from company funds. Relevant Life Insurance is designed to replicate a Death In Service scheme but instead of covering a whole group of employees it protects an individual. Similar to a group scheme, premiums are eligible for corporation tax relief and as it is paid for directly by the business there is no income tax and National Insurance.

Example Savings

Personal Life Cover
Relevant Life Cover
Cost to Employee
Monthly Premium
£100.00
Employee NI Contribution
£3.45
Employee Income Tax
£68.97
Cost to Employer
Monthly Premium
£100.00
Employer NI Contributions
£23.79
Total Gross Cost
£196.21
£100.00
Less Corporation Tax*
£37.28
£19.00
Tax Adjusted Total Cost
£158.93
£81.00
Total saving by using a Relevant Life Plan = £77.93 (49.03%)
*Corporation tax of 19% in the 2018/19 tax year

HMRC does not treat Relevant Life Insurance as a P11D or benefit in kind, meaning there’s no additional tax to pay despite you having the premiums paid on your behalf.

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 and the money is paid back into your company. Holding the money outside your estate, meanwhile, means your estate won’t be liable for inheritance tax on the payout and your loved ones can get access to it faster, without having to go through probate.

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 for more detail.

Relevant Life Insurance
 
HMRC
 
Relevant Life Policy
 
Tax
 
This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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