Tax Benefits of Relevant Life Plans for Directors | Spectrum FA
Date: 10 May 2021 Author: Lewis Cable
Tax Benefits Of Relevant Life Plans For Directors And Their Business

Tax Benefits Of Relevant Life Plans For Directors And Their Business

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.

Relevant Life Plans For Directors

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.

A win-win?

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.

Tax Benefits For Directors

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.

What Are The Tax Savings?

An Example

Life Policy (Non Relevant Life Plan) Relevant Life Plan
Annual premium £1,200 Annual premium £1,200
Employee income tax £352.94 Employee income tax N/A
Employee national insurance £211.76 Employee national insurance N/A
Employee gross earnings needed to fund monthly premium £1,764.71 Employee gross earnings needed N/A
Employer national insurance £243.53
Total gross cost to employer £2,008.24
Corporation Tax Relief £381.56 Corporation Tax Relief £228.00
Net cost to employer £1,626.67 Total net cost £972.00

In the above example, using a Relevant Life Plan for a basic rate taxpayer saves £652.67 each year, which is a saving of 40.00%. For a higher rate taxpayer, using a Relevant Life Plan for the above annual premium, could save you £935.13 each year, which is a saving of 49.00%. Figures updated March 2023.

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).

Relevant Life Plans For Directors

At Spectrum Financial Advice, we understand the unique financial considerations that company directors face. From ensuring the success of their business to providing for their families’ future, directors have a myriad of responsibilities to balance. Relevant life plans offer a strategic solution that not only protects directors and their families but also provides significant tax advantages.

Relevant life plans are specifically designed for company directors, allowing them to take out life insurance and significant illness cover with their company paying the premiums. This arrangement offers immediate personal benefits, as the premiums do not come out of the director’s post-tax income. Additionally, there are substantial tax advantages for the business, as the premiums are tax-deductible expenses, resulting in reduced corporation tax liabilities.

Tax Efficient Financial Protection

Relevant life plans are a cornerstone of tax-efficient financial protection for both employers and employees. By treating the premiums as tax-deductible expenses, relevant life plans can result in reduced corporation tax liabilities for businesses. This dual benefit makes relevant life plans an attractive option for directors seeking cost-effective financial protection.

But it’s not just company directors who benefit from relevant life cover. Employees also enjoy tax advantages compared to personal life insurance policies or group policies, particularly in terms of reduced income tax and National Insurance contributions.

Relevant life cover isn’t treated as a benefit in kind, so employees won’t pay additional income tax or National Insurance contributions on it, as they might with other types of insurance, such as health insurance.

Tax Benefits For High Earners

Relevant life policies are set up using a discretionary trust. By using a trust the proceeds don’t form part of an employee’s estate for inheritance tax purposes. This can be especially beneficial for high net worth individuals or company directors who are at or near the nil rate band for inheritance tax. By keeping the policy outside of their estate, they can potentially reduce the amount of tax their beneficiaries will have to pay upon their death.

Another advantage of relevant life cover is its exclusion from probate. When the person covered by the policy passes away, their family can receive the funds directly, without having to wait for the probate process to be completed. This can provide much-needed financial support to the beneficiaries during a difficult time.

Additionally, relevant life cover offers additional benefits for high earners, particularly in relation to the pension lifetime allowance. For individuals who have already maximised their pension contributions and are approaching the lifetime allowance threshold, relevant life cover can provide an alternative tax-efficient way to provide for their loved ones.

Unlike group life insurance policies, relevant life policies held in a relevant life trust don’t count towards the pension lifetime allowance, allowing individuals to offer additional death-in-service benefits without exceeding the allowance and incurring hefty tax penalties.

How Can We Assist You?

Relevant life plans offer a multitude of tax benefits for both employers and employees, making them an attractive option for businesses looking to provide valuable benefits to their employees while optimising their tax position.

At Spectrum Financial Advice, we can help you navigate the complexities of relevant life cover and tailor a solution that meets your specific needs and objectives. Contact us today to learn more about how relevant life plans can benefit you and your business. For more advice on tax benefits of relevant life plans for directors, or for your no-obligation quote, please contact us online or call us on 01279 315013.


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