Protecting you and your business: Tax efficient life cover

Protecting you and your business: Tax efficient life cover

The global pandemic showed us just how quickly the unexpected can happen and the major impact that it can have. Times of uncertainty such as these highlight the importance of protecting what matters to you and your family.

Although state benefits provide some support, few families want to rely on the state to maintain their standard of living. It is therefore crucial to keep abreast of the level of your insurance cover. It is key to plan for the unexpected so that the business doesn’t falter.

Tax efficient life cover

Life cover is a policy that provides individual life assurance paid for by the company (e.g., to a salaried director). It is paid out as a tax-free, lump sum on the death (or in circumstances where a ‘significant illness’ involves retirement) of the person insured with the proceeds going to the employee's family or financial dependants.

Life cover protects loved ones from financial worries, should the worst happen. It is also a tax efficient benefit which can be offered to business owners and employees. It provides the opportunity for smaller companies to offer a death-in-service benefit to its employees (including salaried directors). Offering life and ‘significant illness’ cover demonstrates how much your business cares about the wellbeing of your employees, which can be useful in both recruitment and retention.

It’s an important financial planning solution for:

Small businesses

Often small businesses don’t have enough employees to be able to offer a group scheme. However, relevant life cover can be on an individual basis. Therefore, a small business can take advantage of the tax efficiencies generally enjoyed by larger companies.

High earning employees

Group schemes are restrictive in the amount of cover provided, and what is included as ‘salary’. For a higher earner this may not provide sufficient cover.

As opposed to a Relevant Life Plan, there are some little-known pitfalls with a group life scheme – this is because a group scheme falls under pension legislation, meaning if the person covered dies, the lump sum death benefit is added to the employee’s pension fund. So, when it comes to calculating the lifetime allowance (currently £1,073,100 tax year 22/23) – this lump sum could make a big difference as anything over the allowance is taxed at up to 55%.

Crucially, benefits from a relevant Life Insurance Policy won’t count towards either the annual or the lifetime pension allowance.

Below is an example of how it works:

Sam Jones is a salaried Director of ABC Ltd. He wants to know that if he dies, his wife, Sue, and son, Josh, have no financial worries. He needs life cover to protect his family; a lump sum of cash from a life policy will provide that protection.

• His company - ABC Ltd - takes out a policy on Sam’s life;
• The plan is put into a Trust with Sue and Josh as beneficiaries;
• Sadly Sam dies or has a ‘significant illness’*;
• The Trust makes a claim to the life company; and
• The life policy pays the claim money to the trustees.

The trustees then pay out to:

• Sue and Josh if Sam has died; or
• Sam himself in the case of a significant illness.

*which leads to retirement or anticipated retirement

In this example, ABC Ltd receive corporation tax relief on the premiums and pay no employer NI on premiums*.

Sam’s benefits aren’t taxed as an employment income (no P11D) and he pays no NI on premiums or benefits*. Any benefit would not be included in Sam’s estate for inheritance tax purposes and benefits do not count towards pensions annual or lifetime allowances.

*as long as premiums are fully employer funded.

We are here to help

At Azets, we have a team of Financial Planners whose aim is to help businesses and individuals ensure they have the right protection for them, their families and their business. Our Wealth Management team will discuss and explore with you your particular circumstances, with the aim of developing a strategy so that appropriate arrangements and protection mechanisms are in place should anything untoward happen.

For further information on tax efficient life cover, please get in touch with your usual Azets advisor or a member of our Wealth Management team.

The purpose of this blog is to provide technical and generic information and should not be interpreted as a personal recommendation or advice.

Azets Wealth Management is a trading name of Azets Wealth Management Limited, which is authorised and regulated by the Financial Conduct Authority. Registered Office: Bulman House, Regent Centre, Gosforth, Newcastle upon Tyne, NE3 3LS. Company Number 05674020. Incorporated in England. Azets Wealth Management Limited is a subsidiary of Azets Holdings Limited.