Contractors trading through a one-man Limited Company are able to fund Relevant Life Insurance by paying the premiums through their business, utilizing a tax-efficient way of protecting their family and dependents. By doing so allows peace of mind in the event of death, meaning that if the worst were to happen, a tax free lump sum will be paid out to dependents to take away the financial pressure.
What’s in the guide?
• How Relevant Life Insurance works
• How is Relevant Life Insurance tax efficient?
• Who is able to use the policy
• Policy restrictions of Relevant Life Insurance
• Key benefits of Relevant Life Insurance
• Next steps
How Relevant Life Insurance works
Relevant Life Insurance is a form of cover, originally designed for companies to provide death in service policies for their employees. However, providers have been able to adapt it for limited company contractors operating on their own as a oneman Limited Company. It is covered by legislation that means premiums paid through the company are viewed by HMRC as business expenses and therefore not subject to the same taxes as those paid through personal income. When you take out Relevant Life Insurance, the policy is placed into a trust for the beneficiaries on the cover. If the worst were to happen and the policy holder dies, the trustees make a claim and the policy pays out in a lump sum outside of the company. Due to the way that the policy is structured in trust, the funds go directly to whoever is noted as a beneficiary, free of Inheritance Tax. If the contractor decides to go back into permanent employment, the flexibility of the policy allows it to be cancelled if no longer needed; continued on a personal basis; or transferred to the new employer at any point.
How is Relevant Life Insurance tax-efficient?*
Relevant Life Insurance premiums are paid through the company and not as part of a post-tax income, which means certain costs such as National Insurance are not payable on the premiums. This is because the policy premiums are seen as a company expense and are therefore tax deductible. The premiums are also not counted towards annual pension allowance limits, they aren’t taxed as Benefit In Kind, there is no Capital Gains Tax and Inheritance Tax issues are avoided as the policy is not included in the company’s estate.
Who can use the policy?
This type of cover is particularly appropriate for contractors operating through a one-person Limited Company because of a lack of employer Death in Service benefits, and secondly because of potential tax savings. If your partner is also an employee of the company and they receive a form of remuneration (i.e. salary or dividends) from the company, then they too can be covered. This offers extra peace of mind by covering both you and your partner against the worst, so you know your family and dependents are protected. It may even be possible for your partner to be covered if they are a non-salaried shareholder.
Relevant Life Insurance policy restrictions
Relevant Life Insurance can only pay a level lump sum, so cannot incorporate any form of Family Income Benefit (i.e. paid at monthly or annual intervals), or protect a personal debt, for example a repayment mortgage on decreasing cover, as this will attract a Benefit In Kind tax from HMRC. The policy can only include Life Cover and also needs to end before your 75th birthday.
Relevant Life Insurance benefits
Replace Death in Service benefits that may have been lost when permanent employment ceased to go contracting. • Reduce your company tax, as premiums will be treated as a business expense.* • No Benefit In Kind consideration against the lump sum paid out.
• It does not affect contractors annual pension allowance.
• The policy is held in a trust so any pay-out is paid outside of the company and the estate, which therefore is not subject to Inheritance Tax.
• Policies can be flexible, allowing contractors to take the policy into permanent employment should circumstances change.*CMME are not authorised to give tax advice. Advice should be sought from your tax adviser
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