It’s quite common for employers to provide life cover for their employees, often via a group death in service (DIS) scheme, but these are usually structured under pension rules and provided by a registered pension scheme provider, which can be problematic.
When assessing the total value of pension benefits, the payment of any DIS lump sum is tested against the Lifetime Allowance before age 75 and should a person have accrued considerable pension benefits, adding the DIS payment may result in a breach of the Lifetime Allowance limit (currently set at £1,030,000), triggering a tax charge of up to 55% on the excess.
An alternative way for a company to provide individual life cover is establishing a Relevant Life Policy (RLP). RLPs have been explicitly provided for in tax legislation since 2003 and available from most major UK insurers. They are a tax-efficient and cost-effective way for companies to provide life assurance for key employees.
Lump sum death benefits provided via RLPs mean that the proceeds don’t form part of a person’s Lifetime Allowance, so only their pension benefits will be tested.
Employees usually pay for life assurance out of their taxed (net) take-home income, whereas directors may have their company pay the premiums, although there’s little advantage in doing this as the cost is generally taxed as a benefit in kind.
RLPs are written as an individual life assurance arrangement and when death occurs within the selected term, the insurer pays out the lump sum to the stated beneficiary via a special trust which is not subject to income or inheritance taxes.
The premiums under RLPs are paid by the employer and are exempt from National Insurance for both employee and employer. It’s not classed as a benefit in kind either, as the employee’s position is entirely unaffected. For the company, premiums are normally treated as a trading expense, escaping Corporation Tax.
Once National Insurance and income tax are taken in to account against the monthly outlay for a policy which is paid personally, the effect is a much higher gross premium. Should the same premium be paid by the company using an RLP, the same premium would benefit from Corporation Tax relief, so the net cost to the employer could be less than half the figure needed to pay the director to fund the plan themselves.
Not everyone can benefit from using RLPs and there are some limitations:
In summary, any companies with senior employees or directors where either the individual or the company are paying premiums for life cover could benefit from reviewing their arrangements. Contact me to discuss yours on 01756 620000.