Save tax with a Life insurance plan

Save on Tax with a LIfe Insurance Policy

You generally choose life insurance plans as one of the best things you can do to save your family from financial difficulties in case something tragic happens to you.

What about the tax? Do we save tax from a life insurance plan? Well, not really.

Unfortunately, life insurance policy is not an allowable business expenses so, you can’t claim insurance payments as part of your annual tax return because HMRC does not regard life insurance as a business expense.

However, there is one way to save tax with life insurance!

Relevant Life Insurance

Yes, Relevant Life Policy is a specific type of life insurance cover, which is tax-deductible but within the framework of a limited company.

This policy is the same as a regular Life insurance policy; if the person dies within a specific period, then it pays a one-off lump sum to a named beneficiary with regard to the protection for your family. This insurance policy is designed for small contractors and employers who cannot get group life insurance.

Relevant Life Policy premiums are fully tax-efficient because it is an allowable business expense. This policy is considered within your company so that national insurance also doesn’t apply. Besides,

  • It doesn’t count towards your yearly or lifetime pension allowance limit
  • It is not a P11D benefit
  • It is portable; you can stop contacting and still can keep the policy
  • HMRC does not include relevant life cover in the definition of ‘relevant benefit.’

Compared to a standard life insurance policy, you can save up to 36% as a basic taxpayer and 52% as a higher taxpayer. Payment of the income tax, national insurance contributions, or employers’ national insurance is not required since it’s not a benefit.

You’ll also fulfil several requirements to get all these tax benefits, but surprisingly these requirements are very few,

There must be a relation of an employee/employer to get tax benefit or buy Relevant Life Insurance. People who are not on your payroll like your spouse even if they are only a shareholder cannot get this policy and its benefits.

You cannot insure your employees after the age of 75. The policyholder is insured until the age of 75.

Surrender value is a lump sum you get if you cancel a policy earlier.

Surrender value is not applicable in Relevant Life Policy.

As per HMRC’s guidelines if the critical illness leads to permanent retirement, then only the tax benefits can apply to relevant life policies with critical illness cover. Which means insurance pays out only if your illness forces you to get retired permanently, or it will lead you to your death?

What if the employee leaves the business?

If your employees leave the business, then they won’t be covered. The policy will be suspended in the event if an employee leaves the company.

However, the continuation benefit can be used. By transferring the policy to a new employer, the policy will keep its relevant life status. The new employer must take over by paying the premiums.

How much insurance should you get?

Employers usually offer somewhere between three or ten times the salary via a company group scheme.

Level and Index-linked are two main types of policy covers.

In level cover, if you insure for £1 million today, then the family will get a fixed amount of £1 million in the event of death.

In index-linked, the payout increases over time, and your premium will also increase.

Relevant Life Insurance gives flexibility and efficiency in tax. Also, this policy is written in trust so that it cannot affect your family in terms of inheritance tax. To arrange relevant life insurance policy, consult a professional financial advisor to choose the right policy.

About The Author: 

Aarif Habeeb is a Digital Marketer and Content manager at 123Financials – Accountants in London. He is a passionate blogger and love to share his knowledge on various subject. Content created by 123 Financials are loved, shared & can be found all over the internet on high authority platforms.