It is fair to say that should the worst occur most people would want to ensure that their dependants and loved ones are looked after financially. The two most common ways of providing life cover are:
- Personally out of post-tax income
OR - Through an employer-funded group death-in-service scheme
A third more tax efficient option is also available for contractors set up as a limited company, is a Relevant Life Policy.
What is Relevant Life Cover?
Relevant Life Policies are single life death-in-service plans paid for by the employer on the life of an employee. Unlike some group death-in-service schemes there is no minimum number of members, making these types of plan ideal for contractors.
The policy can be set up on you or any partner who takes a salary or dividends from the business and will pay out a lump sum on death to ensure peace of mind that your family will remain in the current standard of living and remain financially secure.
More tax efficient life cover
Subject to the “wholly and exclusively rules” Relevant Life Policies are an allowable deduction for business against corporation tax, but they are not treated as a benefit in kind. This results in no national insurance liability for employer or employee and no income tax liability for the employee on the payments into or any sum assured paid out under the plan.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances an changes which cannot be foreseen. There is no guarantee that the favourable tax position will apply in all circumstances.
Case Study
Mr Smith is a shareholding director of ABC Ltd. He currently pays for his life assurance personally at a cost of £200 per month out of his post tax salary. He pays 40% Income Tax on the higher part of his salary and he also pays the additional 2% rate above the upper earnings limit for National Insurance.
ABC Ltd pay employer’s national insurance contributions at the “contracted in” rate of 13.8%. ABC Ltd pay corporation tax at 20%
Paying personally Mr Smith would have to earn £344.83 gross to pay £200 net. ABC Ltd will have paid £47.59 in national insurance on this salary. Totalling £392.41. Both salary and national insurance are allowable deductions for corporation tax making the total cost to Mr Smith and ABC limited £313.93.
If ABC limited took out a relevant life policy on Mr Smith providing the same benefits for his family, the premium would still be £200, no income tax or national insurance to pay, less corporation tax as the plan is an allowable deduction of £40 making the cost £160.
A saving of £153.93 or 49%
The example is provided for illustration purposes only. Actual premiums will depend on individual circumstances. As with all insurance policies, there are exclusions and limitations which may apply.
For more information about the Relevant Life Policy please contact The Penny Group on 0207 061 2345 or at contractors@thepennygroup.co.uk
The Penny Group is a London based financial planning firm and an appointed representative of the Openwork Limited which is authorised and regulated by the Financial Conduct Authority.
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