How to save tax on the cost of your life insurance

Did you know that as directors of a small business, you have a great opportunity to benefit from tax savings on the cost of their life insurance? Unfortunately, few business owners are aware of this potential benefit.

A ‘Relevant Life Policy’ is a type of life insurance that allows you to tax-efficiently put financial protection in place for your family should you die prematurely. No one wants to think about it, but it does happen and we all know a family that has been affected by a devastating event like this.

How much could you save?

The example below shows you could save up to 49% on the cost of life insurance. These are just round numbers, so that you can see how it works.

Life insurance funded through your company1 Relevant Life
Monthly insurance payments £1,000 £1,000
PAYE £690 £0
Employee National Insurance (NI) contributions £34 £0
Employer NI contributions £237 £0
961 £0
Less tax relief for employer (£372) (£190)
Total monthly cost (paid by employee) £1,724 £0
Total monthly cost (paid by employer) £1,589 £810

This summary is based on a higher-rate taxpayer and corporation tax relief at 19%.

1 Assumes the employee’s gross salary is increased to cover the insurance premium.

What are the tax benefits?

As you can see the overall cost of the life insurance cheaper, however you will also benefit from other tax advantages:

  1. Your company will pay the monthly insurance payments on your behalf, but most importantly these will not be treated as a benefit-in-kind
  2. Neither will you nor your company have to make NI contributions on the monthly insurance payments
  3. Your company can usually claim tax relief on the monthly payments as well
  4. your family will generally receive a tax-free lump sum if the worst happens and you die.

Although this is a morbid subject, this could be a great opportunity to protect yourself and your family financially and tax-efficiently.

Action Call

Do you need to re-visit your life insurance cover? Are you worried that your cover is not enough or not right for you and your family? Contact us for a second opinion. We can review your current investments and let you know if these fit in with what your financial plans are.

If you would like to talk to about financial planning, please get in touch for a no-obligation meeting. Go to our website and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.

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It is advisable to take advice from a professional financial adviser when making major financial planning decisions.

Check out our other recent articles here

This article has been prepared in good faith and based on Midlands Investment Agency’s understanding of the law and interpretation thereof at the time of creation. The contents should not be regarded as specific advice and we always recommend that specific advice is sort from a qualified professional. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.

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