Life cover as an employee benefit for directors and employees

This article is written by Dan Payne, an expert financial advisor who works for Golden Oak Wealth Management and collaborates closely with us at Cottons. Dan’s extensive experience and knowledge in financial planning and tax-efficient strategies provide invaluable insights for both business owners and employees. In this article, Dan delves into the benefits and mechanisms of life cover as an employee benefit for directors and employees, offering practical advice on how to make the most of this financial tool.

 

I am often asked for ways to save tax, or at least to make the tax system work better for clients, alongside the work that your Accountant will already be doing with you.

Pension contributions are a tax efficient way of extracting profit alongside salary and dividends, without creating any benefit in kind and help to create a good pot of money over time to help people retire, or as part of an exit strategy.  This is a topic that comes up regularly, but another area that also quite often is discussed with business owners is ‘relevant life cover’.

 

What is relevant life cover?

 

This is a tax-efficient way of providing life cover to company Directors and employees who work for businesses that are too small to set up a group life cover scheme, or if individual Directors require bespoke cover for themselves.

It can act as a one-person employee benefit of life cover for anyone employed in the company, typically between 16 and 75 years old, paid for by the business, treated as a Corporation Tax deductible administrative expense, with the benefit being paid to the family of the deceased.  This, alongside salary, dividends, pension contributions, is a great way of remunerating yourself, or to set up bespoke employee benefits for individuals in your team.

 

Why do people need life cover?

 

If you have a financial liability such as a mortgage, it is advisable to protect this in the event of you dying so that the ongoing burden of financing it does not fall on your family.  If you have anyone who is financially dependent on you, you certainly have a need for life cover.  Basically, any negative financial impact of you dying should create a need for life cover.  As death usually signals the end of your earnings, a lump sum from life cover can be used to maintain your family’s standard of living, replace lost income, cover financial liabilities, build up your retirement savings pot, etc.

 

So, you have a need for life cover.  What next?

 

Generally, your 2 options are as follows:

• You can take out personal life cover in your own name and pay for it from your taxed earnings.
• If you are a business owner employed within your business, the business can take out a policy on your life, written in trust for the benefit of your family, with the premiums paid for by the company, which are tax deductible.

 

If you fall into the second category, why would you not consider doing it this way?  You achieve the same result, but in a much more tax efficient way, as it frees up your own taxed income to be spent in other ways and allows the cost to be paid for by the business.

 

What is the structure of the policy?

 

You have to ensure that the policy is written in the correct structure, which is that the business is the ‘policy owner’, and you or the employee are the ‘life assured’.  It has to be written in a ‘relevant life cover trust’ to stop the benefit being paid to the company, instead being paid out via the trust to your beneficiaries.  As it is done via a trust, the benefits should be excluded from your estate for probate purposes and should therefore not be subject to Inheritance Tax.

 

How much cover can I have?

 

With regards to the limit of the amount of cover you are able to have, HMRC do not set prescribed amounts that are acceptable, but the insurance company interpretation is, depending on your age, a benefit amount of between 15 and 25 times your total remuneration (including salary and dividends) is acceptable, but this must be checked with the insurance company that the policy is to be held.

Once the money is paid out to your family, it can be deployed as they see fit, to pay off an outstanding mortgage, and/or to provide for lost income.  The choice is theirs.  Either way, it will provide much needed financial support at a very difficult time.

 

How much does it cost?

 

The cost of life cover is relatively low compared to other insurances (as insurance statistics show that you are very unlikely to claim).  However, any applications are subject to medical underwriting, so are dependent on your age, smoker status, medical history and lifestyle.  The premiums may be different after the underwriting assessment than the standard rates quoted.

 

What is the potential tax saving?

 

Please note that the policy must qualify under the ‘wholly and exclusively’ rules, so the premiums should be treated as part of the employee’s remuneration.  The cost of the employee’s package should be reasonable in light of their contribution to the business and compared to similar businesses.

If you pay for your insurance premiums from your taxed salary and dividends, you have to factor in the taxation costs of paying you in that way, on you and the business.  Although the business will be able to include the cost of a salary as an administrative expense, there is employer and employee National Insurance, as well as the potential Income Tax for the individual at their highest marginal rate.  With dividends, these are not tax deductible through the business, and you may have dividend tax to pay at your highest marginal rate.

If the business pays for relevant life cover for you, the premium is tax deductible, there is no benefit in kind or other taxation costs, so the net cost is the premium, less the saved Corporation Tax as a result.

Therefore when looking at the total costs for the company and the employee, there is a significant difference between paying from salary/dividends versus setting up a relevant life cover policy.

 

What happens if you leave employment, or if the business ceases to exist?

 

You are able to transfer ownership of the policy from the company to your own personal name within a period of time, built into these policies and usually referred to as the ‘Continuation Option’.  The policy can also be transferred to an alternative company as is required if you move to alternative employment or set up another business.

 

Can I move existing personal policies into the company ownership structure?

 

The simple answer to this is no.  It needs to be set up as a policy owned by the business.  If the company pays the premiums on a personal policy, this will be treated as a P11D Benefit in Kind, so is not effective.  Therefore you should consider your options alongside any existing policies you have in place, as it may be worthwhile retaining existing personal policies if they were set up years ago, as they may be cheaper and you may have had changes to your medical circumstances since they started.

We are specialists in this area, so we are able to advise the best structures suitable for you, and due to our independence, we can recommend the best products and providers in the marketplace.

 

Meet Daniel Payne, Chartered Financial Planner at Golden Oak Wealth Management. Dan works closely with Cottons to offer expert regulated financial advice, bringing valuable insights for our clients. While we’re great at chartered accountancy and business advice, it’s important to know that financial planning has its own set of rules overseen by the FCA in the UK. As your accountants, we’re here to help navigate you to experts like Daniel for thorough financial planning. Understanding this difference is key, and we’re all about making things clear rather than putting up barriers.

 

This article is a joint effort to keep you well-informed. If you need any assistance, feel free to reach out to us or directly to Daniel.

daniel@goldenoakwealth.co.uk

07585 233528

01780 723118