Relevant Life Insurance: Tax Implications for Small Business Owners in the UK

Introduction

Relevant life insurance is a valuable tool for small business owners in the UK,
providing a tax-efficient way to offer life insurance coverage to employees or
directors. In this article, we will discuss the tax implications of relevant life
insurance, helping you understand its benefits and how it can support your
business and employees.

What is Relevant Life Insurance?

Relevant life insurance is an individual life insurance policy taken out by an
employer on behalf of an employee or director. In the event of the insured
person's death, the policy pays a tax-free lump sum to their beneficiaries, usually
family members or dependents. This type of policy is particularly beneficial for
small businesses that may not have the resources or personnel to establish a
group life insurance scheme.

Tax Implications of Relevant Life Insurance

Relevant life insurance policies offer several tax advantages for both the
employer and the employee. Here are the key tax implications to consider:

1. Premiums as allowable business expenses

Relevant life insurance premiums paid by the employer are typically considered
an allowable business expense. This means the premiums can be deducted from
the company's profits before calculating corporation tax. As a result, the
business can save on tax while providing valuable life insurance coverage to its
employees.

2. No benefit-in-kind tax for employees

Unlike some other types of employer-provided life insurance, relevant life
insurance policies do not result in a taxable benefit-in-kind for the employee.
This means that the employee does not have to pay income tax on the value of
the premiums paid by the employer. This tax treatment makes relevant life
insurance a cost-effective way for employees to receive life insurance coverage.

3. No National Insurance Contributions (NICs)

Employer-paid relevant life insurance premiums are generally not subject to
employer's or employee's NICs. This can result in additional tax savings for both
the business and the employee, compared to other forms of employer-provided
life insurance.

4. Tax-free payouts to beneficiaries

In most cases, the lump sum payout from a relevant life insurance policy is tax-
free for the beneficiaries. This tax treatment is due to the policy being written in
trust, ensuring that the payout does not form part of the insured person's estate
for inheritance tax purposes.

5. No impact on annual or lifetime pension allowances

Relevant life insurance policies do not count towards an individual's annual or
lifetime pension allowances, unlike some other types of employer-funded
insurance. This is an advantage for high-earning employees, as it allows them to
receive life insurance coverage without affecting their pension tax relief.

Conclusion

Relevant life insurance offers significant tax advantages for small businesses and
their employees in the UK. By understanding the tax implications of this type of
policy, you can provide valuable life insurance coverage to your employees in a
tax-efficient manner. As always, it is essential to consult with a professional
financial advisor or accountant to ensure compliance with tax regulations and
make informed decisions about your company's insurance needs.