If you want to take out a life insurance policy to protect your dependants should you die, you could benefit from a ‘relevant life’ policy, which is paid for by your limited company, resulting in a significant tax saving.
No-one likes thinking about when they’ll no longer be around. But with the average UK household currently £15,400 in debt — and that’s excluding mortgages — making sure your family’s taken care of should the worst happen to you is a no-brainer. Especially when you’re self-employed.
Here’s how it works.
What is a Relevant Life Policy?
Relevant life cover works like traditional life insurance, except that you don’t pay for it yourself. The policy pays your family a cash lump sum through a discretionary trust if you die. But your company buys the policy and pays the premiums.
Relevant life insurance is designed for contractors and employers who are too small to get group life insurance. You can take out relevant life cover to protect:
- Other company directors, such as your spouse or partner
- Your employees
What are the Benefits of Relevant Life Insurance?
The main benefit of relevant life cover is that it’s extremely tax-efficient. In particular:
- The policy premiums are an allowable business expense, so they’ll lower your corporation tax bill. This is because the policy benefits employees, which makes the expense ‘wholly and exclusively’ for business purposes
- HMRC excludes relevant life cover from the definition of ‘relevant benefit’. So, unlike benefits such as a company car, you don’t pay income tax or National Insurance on it. You also don’t have to declare it on your company’s annual P11D form
- Relevant life cover doesn’t count towards your yearly or lifetime pension allowance limits
- The payout is usually exempt from inheritance tax because it’s paid through a specially-designed trust that keeps it separate from your estate
Relevant life insurance policies are also portable. If you decide to stop contracting, you can still keep the policy. You could pay it yourself (though, in this case, you wouldn’t be able to get tax relief). Or you could ask your employer to pay for it.
Crunching the Numbers: How Much Can I Save By Buying Relevant Life Insurance?
Let’s say you buy a life insurance policy. It costs £100 a month.
If you buy it personally, you’d have to pay the full amount from your post-tax income. If you’re a higher rate taxpayer, this is the same as paying £165 per month gross.
If you buy relevant life insurance, your company would also pay the full £100 per month. That said, the company can deduct the full amount as an expense. Seeing as corporation tax is currently 19%, this means it costs a mere £81 per month net.
And since it’s not a benefit in kind, you don’t have to pay income tax, national insurance or employers’ national insurance.
Sounds Great! So What’s the Catch?
As you might expect, to get all these tax benefits you’ll need to fulfil certain requirements. The good news is that these requirements are surprisingly few.
Let’s go over them one by one.
1. You Can Only Insure Employees
To buy relevant life insurance and get the tax benefits, there must be an employer/employee relationship. In other words, the person whose life is insured must be someone you pay through HMRC’s PAYE (Pay As You Earn) system.
In practice, this means you can only take out relevant life cover for yourself if you work through a limited company. This is because a limited company is a separate legal person and you’re its employee.
Any other people whose life you’ve insured must also be on your payroll. So, you can’t insure your spouse if they’re only a shareholder, for instance.
2. There’s an Upper Age Limit
You can only insure employees up to the age of 75. If you die after your 75th birthday, the policy won’t pay out.
3. The Policy Can’t Have a Surrender Value
Some types of life insurance policies pay you a lump sum if you cancel them early, called the surrender value.
This can’t happen with relevant life policies. They can only pay out if you die while employed and you’re younger than 75.
4. The Policy Can Include Critical Illness Cover. But…
A few years back, some insurers launched relevant life policies with critical illness cover. With critical illness cover, your family gets a payout if you’re seriously ill, for example because of a stroke or advanced cancer.
But in 2016, HMRC said the tax benefits apply to relevant life policies with critical illness cover only if the critical illness leads to permanent retirement. In HMRC’s own words:
“Where the reason for a payment on or in anticipation of retirement is ill health during service, including critical illness… it will fall within the definition of excluded benefit. However, where the illness will not necessarily lead to a retirement, the policy is not therefore exclusively for provision of excluded benefits… HMRC’s view is they are relevant benefits.”
If you think this is confusing, you’re not alone. The upshot is that, following this ruling, many insurers have taken critical illness cover off their relevant life insurance policies.
That said, some have replaced it with terminal illness cover or significant illness cover. This pays out only if your illness forces you to retire permanently or will inevitably lead to your death.
How Much Can You Insure Under a Relevant Life Policy?
There are two main types of relevant life policy cover:
Level cover stays the same throughout the policy’s lifetime. So, if you insure your life for £1 million today, your family will get £1 million whether you die tomorrow or in 2032.
By contrast, the payout from an index-linked policy increases over time, usually in line with inflation. The flipside is that your premium will also increase.
Either way, the amount of cover is usually a multiple of your income. So, you could decide to insure yourself for 25 times your annual income, for instance.
As a contractor, you can take both your salary and dividends into consideration when calculating your income. Many policies also give you the option of increasing your cover under certain circumstances, for example if you get a bigger mortgage or have a child.
That said, the most you’ll be able to insure will depend on your age (the older you are, the less you can insure). There’s also a maximum threshold. This varies from insurer to insurer. But, as a general rule, you won’t be able to insure more than £10 million.
- Relevant life insurance is life insurance paid by your company on your behalf
- You can insure yourself, your spouse or someone else, as long as they’re under 75 and there’s an employer/employee relationship. In practice, this means you can only insure yourself if you work through a limited company
- Relevant life insurance is an allowable business expense. You also don’t have to pay income tax or National Insurance. Should you die, the payout will be exempt from inheritance tax
- Cover is usually a multiple of your income. You can take both your salary and dividends into account when calculating your income. That said, most insurers won’t let you insure more than £10 million