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Tax efficient life cover via your own limited company

Are you paying for your life insurance out of your own pocket?

If the answer is yes, then you may be paying too much as a contractor or limited company director.

Relevant life insurance for contractors and directors is tax-efficient life cover.

In essence, it moves the cost of your life insurance policy from your pocket to your company expenses, and your business will benefit from lower premiums because of the tax savings.

Relevant life insurance is one of the most tax-efficient ways of providing life insurance for an employee/director of a limited company.

The policy is paid for by your business.

The premiums are HMRC-approved as a tax-deductible business expense – provided you meet strict conditions when setting up the policy.

With relevant life insurance, premiums are not treated as a benefit in kind and there are no National Insurance implications.

In addition to the tax benefits, relevant life insurance for directors and contractors protects your mortgage, your family’s future standard of living, your income by safeguarding your future earning potential, and your health.

Why is relevant life insurance for company directors a good thing?

As a limited company director, you work for yourself and can miss out on benefits that traditional employees take for granted.

After all, there is no sick pay or death in service benefit. If you own a limited company and already have life insurance in place, you should consider switching to relevant life insurance as it is tax efficient and could save you money.

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So, what is relevant life insurance for limited company owners? And why could it be right for you?

The headline benefit is tax efficiency. You can immediately save tax by the business paying the life cover premium. It is not treated as a benefit-in-kind as the premium is not included as a P11D benefit.

Policy premiums are not subject to National Insurance payments for the employer or employee.

Plus, your business can claim Corporation Tax Relief on the premiums and the benefit is payable tax-free.

Why is relevant life insurance for directors worth looking into?

Relevant life insurance for directors is one of the most tax-efficient ways of providing life insurance for an employee/director of a limited company.

Your business pays for the policy, and the premiums are HMRC-approved as a tax-deductible business expense.

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With relevant life insurance for directors, premiums are not treated as a P11D benefit.

Neither the employee nor the employer will incur any National Insurance implications. Should the policyholder die, the claim is paid tax-free.

A company director in the 40% tax bracket could make significant savings when compared to personal life insurance because of the tax efficiency of the policy.

Remember that all directors must meet strict conditions when setting up a relevant life policy.

A relevant life policy provides life cover to the dependants of the policyholder. As part of this, the funds are paid via a discretionary trust.

Remember the premiums are paid for by the director’s company rather than the employee. This is classed as a legitimate business expense, this will save tax for you as the director.

What are the key facts about relevant life insurance?

Relevant life policies are either level life insurance, or decreasing or increasing life insurance.

What is the difference between these policy options?

Relevant life insurance policies with level death benefits will carry lower premiums than those with an increasing death benefit.

However, this does not necessarily mean that level death benefits offer superior value since inflation can reduce the level death benefit’s real value.

An increasing (indexation option) death benefit is an option offered in relevant life insurance policies. It rises in value over years.

Decreasing life insurance is a type of life insurance policy that pays out less over time. Arguably this policy type has become less popular in the current economic climate.

However, it’s often used to cover the balance of a repayment mortgage, because the total balance of the mortgage decreases over time and will be paid off in full at the end of the term.

You should always take professional, whole-of-market advice to assess which relevant life insurance policy is best suited to your needs.

Who is covered by relevant life insurance for contractors and directors?

Generally speaking, relevant life insurance will protect the following types of people:

  • Employers looking to provide death-in-service benefits, but with too few employees to set up a group scheme.
  • Directors wishing to provide their own individual death-in-service benefits without taking out a scheme on all employees.

Please note that relevant life insurance for contractors is not available where there is no employer/employee relationship.

How is the benefit paid?

Relevant life insurance provides life cover to the dependants of the policyholder, the funds are paid via a discretionary trust.

What are the potential savings when you compare relevant life insurance to traditional life insurance?

Let’s say you own your own company and pay £100 a month from your own pocket for life insurance – it’s costing your company more than it should.

For starters, if you’re a 40% taxpayer, there’s income tax and 2% employee national insurance contribution, plus 13.8% employers’ national insurance contribution.

In fact, after 19% corporation tax relief, the net cost to your company works out at £158.93 per month for you to pay for the policy personally.

If you pay £100 a month for a relevant life plan you won’t pay any national insurance contributions or income tax on the premiums but you still get the 19% corporation tax relief, making the net cost only £81 per month.

That’s a huge saving of £77.93 a month or £935.16 over the year.

Always seek professional advice

A good financial adviser will take the time to get to know you and will look at all your financial needs. Only then will they advise you of the policy type(s) best suited to your unique circumstances.

They can advise you where significant savings can be made, how you can be more tax-efficient and highlight areas of risk to your person and business that you may not have been previously aware of.

To get a life cover quote for your own business, visit the Limited Company Help site.

For more independent guides – written by the Bytestart team, try