Businesses offer a wide range of benefits to attract the people they need. Unfortunately, many, from subsidised canteens and company cars also attract the attention of HMRC.
Several very worthwhile benefits become much less attractive when you realise that you will be paying tax on them. They include death in service cover, which could provide vital life insurance for your family if the worst happened to you.
But there may be a way to provide this kind of life cover without being financially penalised – with a relevant life policy.
What is relevant life policy?
A relevant life policy is life insurance set up to provide a death benefit for an employee.
Like a death in service policy, it can provide a lump sum to an employee’s family and dependents in the event of their death. However, because of the way it is arranged, a relevant life policy can offer some big tax advantages that death in service cannot.
A larger pay out
Death in service insurance policies are typically offered through the company’s pension scheme. This means they count towards the tax-free pension allowance, currently £1.03 million. With schemes regularly offering up to four times annual salary it would be very easy, particularly for highly paid key employees to exceed that £1.03M threshold if a claim is made. This would mean that any payout would be reduced by a lifetime allowance excess tax charge and therefore leaving less money to support surviving dependents.
Relevant life policies were developed as a response to the reduction of the tax-free pension threshold. A relevant life policy sits outside of an individual’s pension provision. It is written into trust, so any payout would not be subject to a lifetime allowance test. The bereaved would be able to receive all the money.
More tax efficiency
Relevant life policies also bring attractive tax advantages for business owners, company directors and employees.
They are considered a business expense and are therefore paid before taxable profits are generated. This means that they do not require any contribution from the employee or count as a taxable benefit in kind. Employees can enjoy the cover they need without any kind of financial penalty.
What’s more, because they are made before profits are calculated, they reduce corporation tax liabilities. They are also not liable for National Insurance.
Both employers and employees can be better off with a Relevant Life policy.
In most cases Relevant Life Plan premiums and benefits enjoy full Income Tax relief, National Insurance relief and Corporation Tax relief.
Another important advantage is that relevant life policies can be portable. If an employee leaves or the firm is wound up, the death-in-service benefit will be lost. Replacing such cover may prove expensive or even impossible, especially for older workers and those with pre-existing medical conditions.
A relevant life policy however can be transferred to the person covered, allowing them to take over premium payments and maintain the cover even after they have left the original employer.
Are there any disadvantages?
To comply with legislation relevant life cover can only provide life insurance.
This means that replacing personal life insurance may require separate critical illness cover to be arranged.
Relevant life policies usually require full medical underwriting, unlike death-in-service, increasing the time and administration in setting them up, and tending to make them only suitable for key people who will stay with the business.
What should you do?
Business owners switching to relevant life policies to replace death-in-service policies can save money for themselves and their staff. Getting independent help can be essential, and at Continuum we would be please to provide it.
Tax treatment varies according to individual circumstances and is subject to change.