The latest records from the Department for Business, Energy and Industrial Strategy show that there are 5.5 million private sector businesses in the UK, 1.3 million employing businesses and 4.2 million non-employing businesses.  Meaning that 76% of businesses do not employ anyone aside from the owner. The overall business population includes; 3.3 million sole proprietorships, 1.8 million companies, and just over 400,000 ordinary partnerships.

If you own, run or work for a small business, if you are a sole operator, employed as a director by your own limited company and drawing down a salary and dividend as remuneration - you could be taking advantage of a tax-efficient life insurance known as Relevant Life Insurance.

Life insurance is a valuable employee benefit which many people, who work for larger companies will get through their employer’s group life insurance scheme. HMRC supports this provision with tax relief for both the employee and the business. Smaller-sized businesses - usually those employing five people or less - are not usually large enough to run a group life insurance scheme. For employees of such businesses, this means the employee either must take out insurance and pay for it themselves (so does not benefit from any tax savings) or does not make any provision at all and therefore doesn’t benefit from the life insurance than they might need. This is where Relevant Life Insurance comes in, to cover the directors of even smallest limited companies in the UK - so you can ensure sufficient coverage outside of a group scheme.

Relevant Life Insurance allows smaller companies to offer a death-in-service benefit to its employees (including salaried directors). It's set up by the company and pays out a tax-free, lump sum on the death (or diagnosis of a terminal illness) of the person insured. The proceeds go directly to the employee's beneficiaries.

Why is Relevant Life Insurance tax-efficient?

The legislation covering Relevant Life Insurance means it is:

• TAX-EFFICIENT FOR THE EMPLOYEE because HMRC usually views the premiums as an allowable expense for the employer. It is not seen as a benefit-in-kind for the employee, so the employee does not have to pay Income Tax or National Insurance on the premiums. This can be a significant saving for a higher or additional rate taxpayer.
• TAX EFFICIENT FOR THE BENEFICIARIES because the policy is set up using a split trust. Any pay out will also be received free of income tax as well as, usually, any Inheritance Tax liability. Importantly, unlike group life insurance, Relevant Life Insurance is a ‘non-registered’ arrangement so any pay out does not count towards the employee’s lifetime pension allowance. Therefore, the family will not have to pay tax on any lump sum payment in excess of the lifetime allowance when they come to claim on the employee’s Relevant Life Insurance. This can be a significant consideration for employees who may be near the limits of their lifetime pension allowance.
• TAX-EFFICIENT FOR THE BUSINESS because as long as the local inspector of taxes is satisfied that the insurance premiums are ‘wholly and exclusively’ for the purpose of trade, the premiums should be treated as part of the employee’s remuneration package, this represents not only cash but other benefits as well, such as death-in-service or pensions. Therefore, the payments may be an allowable expense in calculating their tax liability which means the business can claim tax relief.

Put simply, there are many benefits to Relevant Life Insurance. Obviously, a director's family benefits from knowing that they'll be taken care of financially if the worst should happen thanks to the tax-free insurance pay out. This pay out can be multiple times a director's total remuneration in salary and dividends.

Meanwhile, the company benefits because premiums are eligible for corporation tax relief, potentially lowering the overall tax bill (this is subject to agreement from your local HMRC tax office, but in most cases as the plan forms part of the director's remuneration package it's an allowable business expense).

However, some of the biggest savings are for the director themselves - as Relevant Life Insurance isn't typically considered a taxable P11D benefit in kind, there's no additional income tax to pay on the premiums for the employee. This is unlike other benefits paid for by the company, such as Private Medical Insurance.

Crucially, if the premiums were paid for outside the company, the director would have to pay out of their own pocket from post-tax income. That means after National Insurance and income/dividend tax have been deducted. Shifting the premiums to the company, therefore, saves on both of these.

Setting up a Relevant Life Insurance policy

Firstly, the business or employer needs to agree to pay the premiums - we can talk you through your options to make sure you get you the right policy for your needs and we’ll deal with the application for you. This type of insurance must be written in trust, with the business as the cover owner and you or the employee as the person covered. The person covered will need to provide information about their health and medical history, earnings and occupation, but we’ll make the process as easy as possible for you and handle all the paperwork on your behalf, to minimise your time and effort. For an informal chat and no obligation quote, our business protection specialists can be contacted on 0800 612 8005 or click here to leave your details and we’ll call you.