When you work as a contractor, you lose some of the benefits that you may have received when you were full time employed. This includes ‘death-in-service,’ which would pay out a lump sum to your family if you were to unexpectedly pass away.
However, if you are now contracting and are a limited company director, you can still have a life insurance policy that will pay off any outstanding debts, clear the mortgage and cover funeral expenses in the event of your death – and pay for it tax efficiently. This is known as Relevant Life Insurance.
Relevant Life Insurance is a policy that provides a payout to your chosen beneficiaries – usually your family and loved ones in the event of your death. Unlike a personal life insurance policy, the premiums are paid for by your limited company which means tax savings can be made.
As the policy is paid for by the limited company and not out of your own pocket, it can be offset against corporation tax. The policy is also not seen as a benefit-in-kind. Therefore it doesn’t need to be included as part of your P11D form at the end of the year. Instead, the premiums are run through the company as a business expense, so you get a tax-relief on the monthly premium you pay.
Additionally, no national insurance contribution is needed from both the company or the individual’s side and the premium will not be counted toward your annual pension allowance limit (£40,000). Therefore, if you have a large pension pot, you are still able to benefit from a tax relief on pension contributions while having the peace of mind that you have a life insurance policy in place.
Relevant Life Insurance is normally written into a discretionary trust. This means you have control over who receives your assets. You can choose your beneficiaries or nominate a trustee to distribute the money as you intend. When a policy is written into a trust, it also means that the beneficiaries won’t (in most circumstances) be liable to inheritance tax. This provides further savings for your family.
If you decide to no longer work as a contractor, you may be able to switch your policy to your new employer, if they agree to continue to pay for the cover. Alternatively, you can take the policy out as a regular personal life insurance policy – however, this means you will lose the tax saving benefits.
If you own a limited company but don’t have life insurance yet, Relevant Life Insurance could be right for you. We work with specialist advisers who are able to handle the whole process for you, from searching the whole of market to find you the best quote. Find out more here.
The information in this article has not been written by Caunce O’Hara & Co Ltd or any of Caunce O’Hara’s employees. None of the opinions or views contained within this article are Caunce O’Hara’s nor do we accept responsibility for any financial advice given within the article.
Caunce O’Hara & Co Ltd do not provide Life Insurance policies nor advice regarding Life Insurance or accounting and bookkeeping.
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