Relevant life insurance is a tax-efficient type of life cover particularly suited to business owners, company directors and highly paid executives. A relevant life plan provides death in service benefits in the form of a lump sum payment, which is made to your employee's beneficiaries on death. It can be offered alongside a group life insurance policy or as an alternative to it, depending on your circumstances and your employee's needs..
Getting professional advice from your accountant or tax adviser to tailor your cover and maximise the tax benefits is essential. You'll also need to make sure that you follow the relevant rules and policy conditions in order to avoid running into problems with HMRC.
Here's our guide to the taxation issues and benefits of relevant life cover.
Taking out a relevant life policy for your employees benefits your business and your employees in terms of the amount of tax each of you needs to pay. While it offers significant benefits to higher earners, it can still be provided to all employees.
Corporation tax advantages
The insurance premiums on relevant life policies are an allowable business expense for corporation tax purposes, so your business can also claim corporation tax relief on premiums and reduce your overall bill.
Lower National Insurance payments
An additional benefit is that relevant life insurance isn't treated as a P11D benefit in kind, so you won't need to pay National Insurance contributions on premiums. This carries the added advantage that you'll have less paperwork to submit to HMRC.
Relevant life cover offers tax advantages to your employees compared to a personal life insurance policy or a group policy, depending on their income level.
Reduced income tax and National Insurance contributions
Relevant life cover isn't treated as a benefit in kind, so employees won't pay additional income tax or National Insurance contributions on it as they might with health insurance.
If they've invested in a personal life insurance policy their premiums will be paid out of their net income.
Relevant life policies are set up using a discretionary trust, meaning it doesn't form part of an employee's estate for inheritance tax purposes. If a company director or high net worth employee is at or near the nil rate band, that could make a big difference in the amount of tax they pay.
The payment also won't be subject to probate, so when the person covered dies, their family can receive the funds straight away.
Additional benefits for high earners
The pension lifetime allowance affects every taxpayer, but it is of particular relevance to company directors and high earners. The lifetime pension allowance refers to the tax-free amount you can receive from both your life policy and pension. The current allowance is £1,073,100, and sums paid over that amount are taxed at 55%.
A company director or high net-worth individual could already have group life cover and have made pension contributions that are close to that level but still wish to make additional provisions for their loved ones.
A group life insurance policy forms part of the allowance, and a relevant life policy doesn't because it's held in a relevant life trust. This allows businesses to offer additional death-in-service benefits without exceeding the lifetime allowance and dramatically increasing their tax bill. You can find out more here.
finding out how much of the allowance an employee has used
Pensions and group life policies are registered with HMRC so employees can check how much of their allowance they've used. A pensions adviser may ask for details of any other pensions that an employee may have to check whether these have been appropriately registered or have any impact on the allowance. A financial adviser may also be able to help employees trace other pension pots.
It may sound as if a relevant life policy is an ideal way for businesses to engage in tax avoidance. However, relevant life insurance must meet strict criteria to ensure that it can't be used to avoid tax or solely for business protection purposes.
Relevant life insurance must only provide life cover
Some life insurance policies include other types of cover, for example, critical illness insurance or disability cover, along with relevant life insurance. Whilst this may enable you to provide cost-effective insurance coverage for your employees, it won't offer the same benefits.
Relevant life cover can only be provided to people aged 75 and under. Most insurers won't offer relevant life cover to anyone over this age in any event. This provision ensures that relevant life insurance is only provided to individuals of legal working age.
No surrender value
A policy can be transferred to an employee or their new employer when they leave. However, the policy can't have a cash surrender value if you want the premiums to be tax deductible.
Where the lump sum is paid
The relevant life insurance payout must go to an individual, a charity or a trust in order to qualify for tax relief. Relevant life insurance is typically set up using a relevant life trust for this reason. This is an important factor as a relevant life insurance policy is designed to provide a lump sum to an employee's beneficiaries. It would ring alarm bells for HMRC if payments were being made elsewhere, and you may find yourself being put through an investigation.
The condition that lump sums can't be paid to a limited company or limited liability partnership means that relevant life cover can't be used solely for business protection.
If you want to talk to an expert about getting the right life insurance for your business, don't hesitate to contact our team of life insurance brokers for a comparison quote.
Frequently asked questions
Can I transfer a relevant life plan to an employee when they leave?
Depending on the terms of your policy, you may be able to transfer it to an employee when they leave. There are often time limits associated with this, so it's important to talk to your insurer.