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As a contractor, it’s generally understood that you will draw a small salary from your business and a larger dividend for tax reasons.
Relevant Life Insurance can accommodate this type of remuneration by insuring a multiple of this drawdown – including both salary and dividends.
The typical amount company directors and contractors look to insure is around 15 times drawdown, but there are insurers in the marketplace which can cover up to 30 times what you’re paying yourself depending on your age, with younger contractors being able to insure more.
Consider carefully what you need to protect. The obvious item to protect is your mortgage, but many people also want to look at an additional amount over and above this for general family protection.
This might include providing enough money to replace your lost income, covering childcare costs, school fees and any other daily living expenses your loved ones would need to meet without your income.
If you want to insure the absolute maximum – 30 times your drawdown – this may restrict the number of insurers in the marketplace who can cover you and potentially lead to a less competitive premium.
With Relevant Life Cover, you’re just buying protection for your life. There’s no additional elements to consider, such as Critical Illness Insurance, which is more complicated and requires some additional research to get the best deal.
With Critical Illness Cover, you’re covering anywhere between 10 illnesses to over 100 and you need to look carefully at the definitions of these illnesses and the likelihood of you being able to make a successful claim on the policy.
You don’t need to worry about doing this additional research with Relevant Life Insurance.
HMRC’s Relevant Life Insurance rules do not allow Critical Illness Cover to be run through a business. Certain providers offer an approved but stripped back version of Critical Illness Cover aimed at covering major illnesses / injuries that will leave you permanently incapacitated and forcibly retired, but these are not as comprehensive as personal policies.
If you want sickness insurance that CAN be paid for by your limited company, you might want to consider Executive Income Protection, which will pay out if an illness or injury prevents you from doing your specific job.
With Relevant Life Insurance, your company is paying the premiums. This provides a number of tax efficiencies over paying for the policy personally.
The first is that, when you pay for a policy personally, you’re paying for it out of income that’s already had income tax / dividend tax and National Insurance contributions deducted.
Relevant Life Cover is paid for directly by your business, so before you’ve taken a drawdown from the company and had these taxes deducted.
Also, premiums qualify for full corporation tax relief and are a tax-deductible business expense.
As a result, Relevant Life Insurance can offer tax savings of up to around 50% compared with a personal policy.
Unlike personal Life Insurance, where writing into trust is optional, Relevant Life Cover is written into trust automatically from the outset. In fact, the policy can’t go live without this vital step.
Although it might sound complicated to write a your Relevant Life policy into trust, it’s actually a fairly simple step and advisers do this every day. We’re really well-placed to help.
Some providers now even allow the policy to be written into trust electronically, saving the hassle of getting witnesses and signatures on paper.
Samantha Haffenden-Angear
Business Protection Specialist at Drewberry
A Relevant Life Insurance trust means:
A couple of quick signatures or a few easy clicks to set up a Relevant Life trust makes a massive difference to your loved ones in terms of the benefit they receive.
As well as qualifying for various tax reliefs on premiums, unlike certain employee benefits, such as Private Medical Insurance, Relevant Life Cover isn’t a P11D or benefit in kind.
P11D benefits have to be declared at the end of every tax year and submitted to HMRC, which then levies income tax and National Insurance contributions on these benefits.
However, HMRC’s rules state that any Life Insurance taken out by a contractor through the business isn’t a P11D, so there’s no tax charge to pay on a policy.
The above tax benefits of Relevant Life Insurance have all been officially approved by HMRC and are signed off to be used to provide contractor Life Insurance under current legislation.
To maintain these tax advantages, it’s essential that the policy is not seen to be primarily used for tax avoidance, something best discussed with your accountant.
Everyone has a pension lifetime allowance, which is the amount of money you can receive from a pension in your lifetime. The penalty for exceeding this is a tax charge of up to 55% on the proportion of your pension pot that exceeds the lifetime allowance, currently £1.03 million in the 2017/18 tax year.
Payouts from some Death in Service schemes count towards your Lifetime Allowance; if you already have pension savings, that means even a modest benefit could tip you over the Lifetime Allowance and incur a tax charge.
However, Relevant Life Insurance payouts don’t count towards the Lifetime Allowance, which could be particularly beneficial for higher earners and / or those with larger pension pots.
Relevant Life Insurance is a tax-efficient Life Insurance policy that’s great for contractors and directors of a limited company looking to protect their loved ones.
There are intricacies of this cover that must be addressed to ensure it remains tax compliant, so get in touch with an adviser today on 02084327333 if you’re considering taking out a Relevant Life policy.
Tom Conner
Director at Drewberry
IMPORTANT NOTICE 🧐
The pension lifetime allowance (LTA). was abolished as of 6th April 2023.
