Tax Benefits Of Relevant Life Plans For Directors And Their Business
A relevant life plan can help both employers and employees reduce their tax liability. As a company director, a relevant life plan is an effective way of taking out protection (life insurance and significant illness cover) with your company (not you) paying the premiums.
Immediately, you can see a benefit on a personal level – the premiums do not come out of your own post-tax income. There is a greater benefit though, the premiums are tax deductible, resulting in less corporation tax.
Yes, definitely. The combined savings result in relevant life plans being significantly cheaper than personal life insurance. As a director with a relevant life plan in place, you will enjoy savings on both a personal and corporate level.
As mentioned, relevant life plans are viewed as an allowable business expense by HMRC, so all premiums qualify for full income tax relief, national insurance relief and corporation tax relief.
The result is possible tax savings of up to 49% (depending on your personal tax status) , with the premiums being claimed as a legitimate business expense.
|Life Policy (Non Relevant Life Plan)||Relevant Life Plan|
|Annual premium||£1,200||Annual premium||£1,200|
|Employee income tax||£352.92||Employee income tax||N/A|
|Employee national insurance||£211.80||Employee national insurance||N/A|
|Employee gross earnings needed Total employee earnings needed to fund monthly premium||£1,764.72||Employee gross earnings needed||N/A|
|Employer national insurance||£243.48|
|Total gross cost to employer||£2,008.20|
|Corporation Tax Relief||£381.60||Corporation Tax Relief||£228.00|
|Net cost to employer||£1,626.72||Total net cost||£972.00|
In the above example, using a Relevant Life Plan for a basic rate tax payer saves £652.72 each year, which is a saving of 40.25%. For a higher rate tax payer, using a Relevant Life Plan for the above annual premium, could save you £935.14 each year, which is a saving of 49.03%
The figures in the table above are for illustrative purposes only. Employee income tax rate assumed at 20% and employee national insurance rate assumed at 12%. Tax rules may change in the future. The information assumes that the same rate of Income Tax/National Insurance applies to the whole of the premium. Tax treatment will depend on individual circumstances.
Relevant life plans are not seen as a ‘benefit in kind’ so there is no need to declare the insurance policy premiums on your annual P11D form. You can use your salary plus dividend draw-downs to work out the maximum level of protection, normally at around 15 – 30 times your income (depending on age variables).
Another tax benefit of relevant life plans for directors is that there is no inheritance tax due on any sums paid out.