Relevant life insurance as a tax-free benefit

January 20, 2022|In KRW Tax Tips|By Keith Witchell

Employer funded relevant life insurance can provide a useful tax-free benefit for company owners, with the company able to save Corporation tax on the premiums.

Taking out life cover to ensure your loved ones are financially secure should the worst happen gives you and your family peace of mind, and represents sound financial planning for business owners.

It has long been possible to take out Keyman insurance which effectively means that your company foots the bill for the premiums, on which it can claim Corporation Tax relief.  However, the downside of such policies is that any pay-out in the event of your death would usually be subject to tax.

The alternative was to take out personal life cover, so that any pay-out would go to your loved ones tax-free, but then if your company pays the premiums they would be classed as a taxable benefit and entered on a form P11D, with personal tax and Class 1A National Insurance being triggered.

However, Relevant Life Insurance manages to achieve the best of both worlds, with the company paying the premiums and getting Corporation Tax relief on these as a business expense, but with no taxable benefit for the Directors and employees concerned, and usually with no tax to pay on any pay-out under the scheme.  There are even Inheritance Tax advantages available too, plus any pay-out doesn’t count towards the pensions lifetime allowance unlike other life insurances.

Relevant life policies are slightly more restrictive than normal life insurance, for example the maximum age for a relevant life policy cannot exceed 75.  But in most cases they represent an attractive tax efficient perk for a company owner which is well worth considering.

Some Relevant Life Insurance providers are also now offering significant illness cover in addition to life cover which will pay-out in the event of you being diagnosed with certain serious illnesses which might lead to your forced retirement.  This offers a good alternative to normal critical illness policies which don’t enjoy the same tax benefits.

We work closely with business owners to find the most tax efficient way to structure their earnings from their company, and this falls squarely into that category, along with making pension contributions through their company, or getting an electric company car.

If you would like further advice on this matter then please contact me.

Key Facts

  • Relevant life premiums are not a taxable benefit for the director/employee
  • Corporation Tax relief is available for the premiums in most cases
  • Any payout under a relevant life policy will be tax-free and goes to your loved ones
  • Significant illness cover is also being offered with the same tax benefits by some providers
  • Relevant life offers significant tax savings compared to Keyman or personal life insurance

For further advice on this matter, please contact me.

Keith Witchell