A few years ago, it was impossible to find levels of cover to rival ‘death in service’ life insurance cover if you were a small limited company. Now, a Relevant Life Policy (RLP) can provide the level of cover for Directors and shareholders of small limited companies with the tax benefits that ‘death in service’ cover attracts.
When you start life as a contractor or freelancer, you’ll need to consider organising your own life insurance. A ‘Relevant Life Policy’ is a tax-efficient life policy designed for small businesses. Standard life insurance policies are paid for by you as an individual, after tax. The beauty of a RLP is that it is paid for through your limited company, offsetting corporation tax and it doesn’t attract personal tax either.
The RLP is designed for businesses that don’t have enough employees to warrant a group life scheme; you can set up a RLP for just yourself as the Director of your limited company.
You can normally insure up to 20 times your annual income; your salary, dividends and benefits in kind. Some insurance companies can cover up to as much as £10m.
The premiums and benefits don’t count towards your annual or lifetime pension allowance which is important if you have a large pension fund or you want to maximise your contributions into your pension.
Restrictions to be aware of
When looking at a RLP to provide life cover, there are some restrictions to consider:
- The cover must be paid in a single lump sum before the age of 75;
- Only death benefits can be provided;
- Benefits must be paid through a discretionary trust (this keeps the policy payments in trust for the company); and
- Beneficiaries are normally restricted to family members and dependants.
Why is a discretionary trust used?
There are legislative restrictions on who the benefits can be paid to. The use of the trust is the most practical way to ensure the requirements are met.
- Having benefits paid through the trust ensures they can’t be taxed as part of the trading income, nor do they form part of the company’s assets.
- The trust is discretionary, allowing trustees to be flexible in who they pay benefits to. However the person covered can advise the trustees of their intentions by completing a nomination form. Although this is not legally binding, it helps to guide the trustees. The trustees are usually directors of the company.
- Using a trust ensures that in most circumstances the benefits paid are free of both income tax and inheritance tax.
The tax-saving benefits
RLPs are usually classed as an allowable business expense, so all premium and benefit payments qualify for corporation tax relief, income tax relief and NI relief. In real terms this means that the cost of premiums can be reduced by up to around 49% for a higher rate tax payer and by 40% for a basic rate tax payer. Here’s an example of the savings:
|Individual life policy||Relevant life policy|
|Premium||£100 per month||£100 per month|
|Employee National Insurance Contribution (assuming 3.25%)||£5.73||None|
|Income Tax (assuming 40%)||£70.48||None|
|Gross earnings needed||£176.21||£100|
|Employer National Insurance Contribution (assuming 15.05%)||£26.52||None|
|Total gross cost||£202.73||None|
|Less Corporation Tax (assuming 19%)||£38.52||£19|
|Tax adjusted total cost||£164.21||£81|
That means you could be saving around £1,000 per year through tax efficiencies with a RLP.