The tax treatment of relevant life plans is in no small part the reason for their booming popularity among small business owners. Small companies are able to take out Relevant Life insurance for the benefit of their employees.
Recently Aviva even got the green light from HMRC on a new life and critical illness option boosting their popularity ever further among directors of small companies.
How HMRC treats the taxation of Relevant Life policies is the key to this success so we thought we would summarise these benefits in comparison to other forms of life cover.
Is relevant life a P11D benefit in-kind?
No, premiums are viewed as tax deductible by HMRC and therefor not seen as a benefit in-kind for the employee. This means that the employee (Director) does not have to pay tax on the premiums. The business will be paying for the plan rather than the employee or director paying out of already taxed income privately.
This is why there are huge savings to be made:
- No income tax
- No national insurance
Is a relevant life plan subject to corporation tax?
No, because a relevant life plan is owned by the discretionary trust that they are wrapped in for the benefit of the beneficiaries, and NOT the business proposing it.
Do the premiums count towards the employees annual pension allowance?
No, unlike a group life insurance plan relevant life does not count towards an employees life time pension allowance, currently this is capped at £1.000,000.
When the plan pays out, is that tax efficient too?
Yes, and in more ways than one: unlike a “keyman” insurance policy or most private plans, the beneficiary is a discretionary life trust rather than the company or the individual.
On a KeyMan insurance policy although the money is paid to the business tax free, should the money subsequently be taken out of the business to remunerate an employee or director that money would be taxed in the same way as any other income.
As the benefit of a relevant life plan is always paid into trust that also means that it is kept out of the individual’s estate for the purposes of inheritance tax.
Speak to your accountant:
We always recommend that you speak to your accountant or tax adviser to check your position on tax advice. Although we can advise on the relevant life policy and setup the trust for you for free we cannot give tax advice!
Information regards to taxation levels and basis of reliefs are dependent on current legislation. Individual circumstances are not guaranteed and may be subject to change.
The Financial Conduct Authority do not regulate trusts.