Posted 6 Dec 2021

Can I claim tax relief on my life insurance through my business?

There are now life insurance policies that attract substantial tax savings which can save you up to 49% on your premiums. These types of policies are called ‘Relevant Life Insurance’ which refers to the ‘relevant individual’ being covered.

These policies are extremely popular with company directors and key staff in small or medium-sized businesses. You can also take out this type of life insurance if you are a director within your own limited company, which can save you nearly 50% of the cost of your life cover.

You should note that this is not to be viewed as a form of tax avoidance, but a legitimate way to reduce your monthly outgoings. This scheme has been approved by the HMRC and this product was introduced to the market in 2008, so has been available for over 13 years.

Here are some of the main details about this type of policy and why you should consider relevant life insurance through your company.

Who can have Relevant Life Insurance?

There are some key elements to understand when you consider relevant life insurance, such as ‘is it available for me?’. This type of cover is available for the majority of people who have a salary and pay tax under ‘Schedule E’.

The application for cover will be made by the company or business (or by you on behalf of the business), and the company will pay the premiums. The employee MUST have a relationship as employee/employer with the company.

Note: The death claim cannot be paid to the company and the company cannot financially benefit.

Company types that can apply for a relevant life policy:

  • Limited Companies
  • Partnerships
  • Charities
  • Any other businesses where an employer/employee relationship exists

Who can have a relevant life insurance policy?

Here’s a list of the main types of people who can apply for a relevant life insurance policy and claim tax relief.

  • Salaried Directors
  • Employees
  • Key Individuals
  • Contractors

Here’s a list of who doesn’t qualify for relevant life insurance

  • Sole Traders
  • Equity Partners of an LLP
  • Individuals taxed under ‘Schedule D’

Example:

ABC Electrical Ltd.

This is a small electrical business which is a Limited Company with only 1 employee/director who also works in the business (electrician).

We arrange a relevant life insurance policy for the Director of ABC Electrical Ltd.

Directors pay

Salary: £20,000

Dividend: £12,000

Amount of cover: £150,000 (relevant life)

In this example, the electrician would be able to apply for relevant life insurance which would be owned and paid for by ABC Electrical Ltd. The company director would be able to claim up to 49% tax relief on his premiums, saving nearly half what he would pay personally.

What is a relevant life insurance policy?

This type of policy was introduced to the insurance industry in 2008 as a tax-efficient policy for business owners, and employees of small businesses. The policy is owned by the company and premiums are paid for by the company.

A relevant life insurance policy is owned by the company, but the benefit is paid to the family of the life insured (employee). If the life insured dies during the term of the policy, then the benefit (claim) will be paid to the beneficiaries (family) through a ‘discretionary trust’.

Premiums paid are not classed as a ‘business expense’ and therefore are not considered to be a ‘P11D Benefit-in-Kind’.

Main things to consider for relevant life insurance:

  • Available to employees between 17 and 74 (some insurers may vary)
  • Policies must end before the employees 75th birthday
  • Can be transferred (ported) from a business to a personal policy (some insurers may vary)
  • Sum assured can be a Level Term policy or can increase with inflation (indexed)
  • Can be arranged on a single life basis only
  • Spouses/Partners can only be insured under their own policy if they are also employed by the company
  • Is not an investment so will only payout in the event of death
  • Can only include Critical Illness Cover that will prevent the employee from working again (some insurers may vary)

What are the tax-efficient areas that Relevant Life Insurance offers?

Here is a list of the tax-efficient elements that apply to a Relevant Life Insurance policy for tax savings. We must stress that it is always worth speaking to a tax expert to get tax advice before you purchase this type of policy.

  • Corporation Tax is the main element of tax savings that can be applied to a relevant life insurance policy. You can offset your premiums against your profits and therefore reduce your corporation tax liability.
  • Income Tax is also reduced because the premiums are paid by the company and are not classed as P11D benefit-in-kind. Any income tax that would have been charged when a premium is paid personally would not be relevant.
  • National Insurance is not required to be contributed by the employer or employee against the premiums that will be paid.
  • Inheritance Tax would also not be charged as this could be reduced due to the benefit being paid directly to the beneficiaries via a Trust. Any benefit would therefore not form part of the life insured’s estate.

For smaller companies with multiple employees, this can be considered to be an alternative to ‘Group Life Insurance’. This can save you time and money because group schemes can be more expensive and can be time-consuming to administer.

You can also seek further guidance and information by visiting HMRC ‘Employee Income Manual’.

Visit: EIM15045 – Employer-financed retirement benefits schemes: relevant life policies

Daniel Sharpe-Szunko
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