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Relevant Life Insurance HMRC Tax Treatment (updated) 2023
- Jody
- May 8, 2017
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Relevant Life Insurance Tax Treatment Explained
Relevant life insurance is a form of insurance that provides financial protection for an individual. It is typically taken out by employers to provide death-in-service benefits to their employees.
This article will explain the tax treatment of relevant life insurance, which includes how it is taxed and the implications for both employers and employees.
Relevant life insurance is subject to a range of taxes and other charges, with implications for both employers and employees. This article will explore the tax treatment of relevant life insurance in detail, including how it is taxed, what exemptions may apply, and any potential implications for those taking out or benefiting from this type of policy.
It will also consider any recent changes to the taxation rules surrounding relevant life insurance.
What Is The Tax Treatment On Relevant Life Insurance Policies?
Relevant life insurance policies are a type of life insurance that is available to employers and the self-employed to provide a lump sum payment to an employee’s family in the event of their death. They are typically used to replace lost income or pay off debts if an employee dies.
As such, it is important for employers and employees to understand what the tax treatment of relevant life insurance policies is. The tax treatment on relevant life insurance policies depends entirely on how they are set up and how the premiums are paid.
If the policy is set up through a business, then corporation tax relief may be available against the premium payments made by the employer. The policy itself is also exempt from Inheritance Tax, meaning that any benefit payable under it will not be subject to Inheritance Tax.
Additionally, any benefits paid under the policy are generally not subject to Income Tax or National Insurance Contributions (NICs), as long as they meet certain criteria. It is important for employers and employees to understand these criteria when considering taking out a relevant life insurance policy.
Relevant Life is not the same as key man insurance. You can find more details on the tax treament of key man insurance here.
Is Relevant Life Cover Tax Deductible?
The question as to whether relevant life cover is tax deductible has been at the heart of many debates. This article aims to provide a comprehensive overview of the tax treatment of relevant life insurance in the United Kingdom.
It will discuss the HMRC’s stance on deductibility and look into the implications for employers and their employees. In summary, whilst there is no specific provision in statute law that allows employers to claim a deduction for premiums paid on relevant life policies they can, in certain circumstances, claim a deduction under existing case law.
The employer will also be able to pay part or all of an employee’s premiums free from income tax, national insurance contributions (NICs) and employer’s NICs provided certain conditions are met. Therefore, it can be concluded that relevant life cover is generally tax efficient for both employers and employees.
Is Relevant Life Cover A Benefit In Kind?
In order to assess the taxation implications, it is necessary to consider the extent to which the policyholder has funded or paid for any premiums.
If premiums are wholly or partially funded by an employer, then generally the premiums will be subject to benefit in kind rules.
In particular, it is important to note that where an employee has contributed towards their own relevant life cover premiums then these may not be subject to benefit in kind rules.
This would depend on how much of the premiums have been provided by the employer and how much has been paid by the employee.
Ultimately, such decisions should be taken with advice from a financial adviser who is familiar with this field of taxation.
What Are The Tax Benefits For The Company
The relevant life cover is a benefit in kind and this has implications for the company, particularly in terms of the tax benefits they can expect to receive.
Companies that provide their employees with relevant life cover are able to obtain corporation tax relief, as the premiums paid are considered a business expense and are therefore deductible against profits. This means any premiums paid by the company can be offset against their taxable profits, reducing their corporation tax bill.
The amount of relief received on any premiums paid depends on how long the policy has been taken out. If it has been taken out for less than 12 months, then only 50% of the premiums can be used as an allowance against the taxable profits. If however the policy was taken out more than 12 months ago, then 100% of the premiums can be used as an allowance.
Ultimately this allows companies to reduce their overall tax burden and make significant savings over time.
What Are The Tax Benefits For The Employee
The tax benefits available to employees with life insurance policies depend on how the policy was acquired.
If the policy was purchased from an employer, the premiums are generally considered a fringe benefit and are not subject to federal income tax. The death benefit is also typically excluded from taxation for the employee’s beneficiaries.
If the employee purchases a life insurance policy outside of their employment, they may be able to deduct a portion of the premiums on their individual income tax return as long as they meet certain criteria. Additionally, when death benefits are paid out under these policies, they are not subject to federal income or estate taxes.
It is important that employees understand any applicable tax implications before purchasing a life insurance policy.
Conclusion
Relevant life insurance provides tax advantages for both companies and employees.
Companies can deduct the cost of premiums from their taxable profits, while employees are able to receive a tax-free death in service benefit.
These advantages ensure that relevant life cover is an attractive and beneficial option for employers and employees alike.
As such, it is important to understand the tax implications of relevant life insurance before making a decision.
Knowledge of the associated tax benefits can help make informed decisions about which type of policy best suits individual circumstances.
While we do give advice on relevant life insurance we are not qualified to give tax advice. It’s always worth speaking to your accountant or a qualified tax adviser. There is limited information from HMRC but we can provide template letters for you to use if you want to write to HMRC to check you’re tax position. For more information and the latest updates, you can check out the government page here.
For those people who are looking for a quote please go to our relevant life insurance page or to work out the savings why not try our Relevant Life Insurance calculator or give us a call on 020 7112 8844.
Information regards to taxation levels and the basis of reliefs are dependent on current legislation. Individual circumstances are not guaranteed and may be subject to change. The Financial Conduct Authority do not regulate trusts.
Related Information
Jody is the Managing Director and founder of My Key Finance Ltd. He has over 22 years of experience as a mortgage & protection adviser. He is an authority within the UK business protection market & specialises in key man insurance, relevant life cover and shareholder protection. Jody has written articles for Business Matters, Business Directory and has been featured in Forbes. He is Authorised & Regulated by the Financial Conduct Authority and is CeMAP qualified.
As editor and author of our blog, Jody hopes to educate and advise people with more in-depth information & guidance on life insurance and business protection.
Jody & his wife Lori featured in the BBC programme “The House £100k Built” He is also a keen Arsenal fan and loves nothing more than watching his son & nephews play football at the weekend.
