RELEVANT LIFE PLAN for SMALL BUSINESSES
Life insurance cover is a benefit large companies often offer their staff as a perk. The problem is if you own a small business employing less than five people, then the cost of taking out a group insurance scheme may be too expensive.
So, if you want to offer your staff life cover without the high costs, then the good news is you can, and you can save money on tax doing it. For businesses that are not yet big enough to set up a group insurance scheme there is a company life insurance plan called relevant life insurance that works out much cheaper.
What is relevant life cover?
Setting up a relevant life policy is a tax efficient way to provide peace of mind for your staff, directors and their families – including owners of limited companies. It is also treated differently than group insurance schemes because it isn’t regarded as a benefit in kind for tax and doesn’t count towards pension and retirement. This can result in big savings for a small business.
How does relevant life cover work?
Relevant life cover is a death in service benefit paid for by employers. It works the same way as individual life insurance with a lump sum paid to employees or directors and their families if the worst happens and a person covered by the policy dies. Employees and directors can feel secure that their loved ones will be taken care of for as long as they are employed by the business.
Life cover applicants will be treated in much the same way as those taking out personal life cover. They will be assessed on health, age, lifestyle as well as long term financial commitments such as mortgages. This information will then be used to set the premium and costs will vary depending on the level of cover required.
Relevant life insurance plans have no cash-in value and are only in place for as long as a person is employed by the business.
|How a relevant life policy can cut company costs|
|Premium||Ordinary life cover||Relevant Life Policy|
|Company gross cost||Employee’s National Insurance contributions at 2%||£34||Nil|
|Income tax @ 40%||£690||Nil|
|Employer’s National Insurance contributions at 13.8%||£238||Nil|
|Total gross cost||£1962||£1,000|
|Company net cost||Corporation tax relief at 20%||£392||£200*|
Source: Royal London *Assumes that corporation tax relief at 20% has been granted under the ‘wholly and exclusively’ rules. In both cases we’ve assumed a payment of £1,000 each year for the life cover on an employee who’s paying income tax at 40% and employee’s National Insurance at 2% on the top end of income. We’ve also assumed that the employer is paying corporation tax at the small profits rate of 20% and will pay employer’s National Insurance at the contracted-in rate of 13.8%
Who can have relevant life cover?
Anyone who runs a business employing less than five people should think about taking out a relevant life cover policy, including limited companies.
Relevant life insurance is not available for sole traders because there needs to be more than one person working in the business. There is a maximum age limit of 75 for relevant policiesand new policies can only be taken out up to a maximum age of 73. Anyone benefitting from cover must also be a UK resident.
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Benefits of a relevant life plan for you and your business
Is relevant life cover a benefit in kind?
A relevant life plan is not treated as a P11D benefit which is good news for you and your staff if you are a business owner. The cover is not treated as income, so employers and employees pay no income tax or national insurance on the premiums
What are the benefits of relevant life cover for directors?
Directors can make big savings on life cover by taking our relevant life cover for staff and themselves. If you are a director of the business, you can pay your life insurance premiums through the company rather than your own salary. Also, if you are a high earner you will benefit from not having your life insurance payments taken off your pension allowance.
Your premiums will be treated as an allowable business expense by HMRC. With Corporation tax relief available, and no additional income tax or NI to pay, the savings to be made with relevant life insurance are huge. A basic rate taxpayer will save 40% of the cost, with the saving rising to almost 50% for a higher rate tax payer.
Unlike group life schemes, relevant life cover doesn’t count towards the annual pension lifetime allowance, which is £1.03 million (at the time of writing). So, in short, you don’t have to worry about your life insurance premiums creating a tax burden for your beneficiaries. Unlike with group schemes, the lump sum will be tax free.
What are the benefits of relevant life cover for employees?
A relevant life plan brings two main benefits for your staff. They no longer have to worry about paying life insurance each month from their salaries, saving them hundreds of pounds a year. They will also have the peace of mind that you are taking care of them and their families if the worst was to happen.
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