If you are an employer and thinking about insuring your employees with a suitable life insurance policy, then a relevant life policy may be a good idea for you. While you are taking a decision about setting up life covers for your employees, it is also essential that you not only think about the disbursement expenses but also the actual expenses of offering the benefits and funds to the employees.
Relevant life cover saves high earning individuals from taxation and other issues.
Example of how relevant life covers offer tax benefits to employers
Given below is an example which will clarify how employers can save on their tax payments when they cover their employees with relevant life policies. The comparison has been carried out between an ordinary life policy and a relevant life policy. The impact of taxation on the actual expenses of the similar amount of net payment for both policies has been shown here.
| Relevant Life Policy | Ordinary Life Policy | |
| Payment | ₤1,000 | ₤1,000 |
| Income tax @40% | – | ₤690 |
| Employee’s National Insurance @2% | – | ₤34 |
| Employer’s National Insurance @13.8% | – | ₤238 |
| Overall gross expenses | ₤1,000 | ₤1,962 |
| Tax relief under corporation tax @20% | ₤200* | ₤392 |
| Net Cost | ₤800* | ₤1,570 |
Remember, for the purpose of calculation, it has been assumed that the exemption offered under corporation tax @20% has been offered according to the regulations of “exclusively and wholly”.
In both of the circumstances, it has been assumed that the premium payment is ₤1,000 on an annual basis for the life insurance cover of a staff who has been bearing the national insurance cost @2% and income tax @40% over his earning. It has also been taken as assumption that corporation tax has been paid by the employer @20% (which is typically the small profits rate) and the national insurance is being paid by the employer @13.8% which is the agreed in rate.
The instance has worked on the simple assumption that the employee has been bearing the expenses from his post-tax earnings. In a situation where the employer is bearing the premium expenditure, it would be considered as the employer fulfilling a financial obligation of the worker. This is happening when the worker has consented to pay the premium, however the premium is paid by the employer. As a result, the onus of paying the national insurance payments and income tax payments comes on the employee.
As a result of this, the overall expenditure can be shown by the employer as a trading cost, no matter if the company has borne it or the amount has been spent as salary.
The benefit of a relevant life policy is that the employee has no obligation of national insurance or income tax payments. The simple reason behind this is the employer has set up the policy and he will bear these expenses on behalf of the employee. Till the time the local inspector of taxes is acknowledging the payments as “wholly and exclusively for the objective of business”, relevant life tax advantages will continue to be available to the employer. Other advantages include the following:
- Benefits are typically offered without inheritance tax. However, exit costs and recurring costs may originate in special situations.
- Benefits disbursed with the help of a discretionary trust are disbursed without income tax.
- Benefits are not included in the lifetime pension allowance.
- Premiums are not included in the pension allowance given every year.
About the Author: Sam Payn is an enthusiastic blogger. For a number of years, he has been making contributions to various websites and blogs by writing articles on a range of topics such as life insurance, credit cards and taxation.
