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Relevant Life Insurance | Bright Money Independent

Relevant Life Insurance

A relevant life policy is available to employees, including salaried directors, setup by the company to pay tax free lump sum in the unfortunate event of death.

It is a tax efficient life assurance policy that is written in trust.

Premiums are paid for by the employer and usually treated by HMRC as a business expense.

It can be used as part of an employment package to incentivise staff, at a relatively low cost.

Who might benefit?

  • Limited company salaried directors
  • Businesses too small for group life scheme
  • High earning employees
  • Company may benefit as used to attract and retain staff
Non relevant life policy Relevant life policy
Cost to employee (45% tax) Cost to employee (45% tax)
Monthly premium £ 50.00 Monthly premium n/a
Employee national insurance £ 1.89 Employee national insurance n/a
Employee income tax £ 42.45 Employee income tax n/a
Gross earnings needed £ 94.34 Gross earnings needed n/a
Cost to employer Cost to employer
Monthly premium n/a Monthly premium £ 50.00
Employer national insurance £ 13.02 Employer national insurance n/a
*Less corporation tax -£ 21.47 *Less corporation tax -£ 10.00
Total saving using Relevant Life Policy = £45.89 (53.43%)

These figures are for illustration only. Tax calculations are based on 2014/15 tax rules and may change in the future.

* an employer who wishes to treat relevant life premiums as an allowable business expense should speak to their accountant, who may need to liaise with the employers local inspector of taxes.

Why have a policy in trust?

Cash will be paid direct to the beneficiaries without the need of grant of probate therefore paid without unnecessary delays.

  Out of Trust In Trust
Assets 1,000,000 1,000,000
Life Insurance 500,000 500,000 (in trust)
Taxable Estate 1,500,000 1,000,000
Tax Free Allowance 325,000 325,000
Total Liable to tax 1,175,000 675,000
Total Inheritance tax 470,000 270,000
Total paid to beneficiaries 1,500,000
– 470,000
= 1,030,000
– 270,000
= 730,000
+ 500,000 (in trust)
= 1,230,000
Total saving using a relevant life policy in trust = £200,000 for a policy that cost half the price.

These figures are for illustration only. Tax calculations are based on 2016/17 tax rules and may change in the future.

Amount of cover

The maximum amount of cover available depends on the employee’s age and remuneration and is reduced if the employee already has any family protection cover in place.

  • Age 17-49 up to 25x remuneration package
  • Age 50-59 up to 20x remuneration package
  • Age 60-73 up to 15x remuneration package

What make this policy so good for company directors

  • You make tax savings compared with paying for it personally
  • Payments are normally classed as a business expense
  • Keeping the plan in trust offers the potential to plan for inheritance tax if you estate is worth more than the current inheritance tax threshold

In a small business

Phil is an owner-operator of a small web development business. Phil works full-time and employs two others, Jacob and trainee Sian. Phil cannot access a full-group life scheme but his financial advisor suggests he takes a look a relevant life policy.

This chart explains how the costs work

  Phil Jacob Sian
PREMIUM £100 per month £70 per month £30 per month
Employee National insurance none none none
Income tax none none none
Total company gross cost £100 per month £70 per month £30 per month
Employer NIC none none none
Less corporation tax (assuming 20%) £20 per month £14 per month £6 per month
Tax adjusted cost £80 per month £56 per month £24 per month