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Life Insurance For Limited Company Contractors

How to get your limited company to pay for your life Cover

If you have a family, it is highly likely you will have some form of life assurance in place to give them financial security in the event of your death.

As a limited company contractor you may well have worked for a larger company in the past and enjoyed the benefits of an employer sponsored “Death in Service” scheme. This would have paid you a handsome cash sum on death and possibly a pension for your dependant spouse. It is also unlikely you would have had to contribute towards this, nor would you have suffered any tax penalty on the benefit.

Unfortunately, for legislative and commercial reasons these highly tax efficient Death in Service schemes have not been historically available for small contractor companies. This has meant that you have had to fend for yourself and pay for this cover from your own back pocket out of taxed income.

Alternatively you may have chosen to pay from the company account, but this will not have saved you anything as the taxman will just treat it as income and tax you accordingly.

This situation has now changed and a major life assurance company has recently launched a product aimed at this market. It is called a “Relevant Life Policy” and is designed specifically for the small company. These policies are taken out by your company and written under a discretionary trust for the benefit of your dependants.

What are the tax advantages?

  • Premiums paid by your company are not treated as a benefit in kind and there is no personal tax liability on you. This saves a significant amount of money, especially for the higher rate taxpayer.
  • There are no National Insurance consequences for you or your company.
  • Provided your accountant is happy that the premiums qualify as being a trading expense as part of your remuneration, you may be able to claim corporation tax relief on the premiums.
  • Benefits paid to your dependants under the trust are free of income tax, and in most situations free of inheritance tax.
  • Unlike most company sponsored death in service schemes, Relevant Life policies do not form part of your annual or lifetime allowances for pension purposes.

(Further details are available in the taxation footnote)

What are the advantages of using a discretionary trust?

Having benefits paid through a trust ensures they cannot be taxed as part of the companies trading income, nor do they form part of the company’s assets.

There are restrictions in the legislation as to who benefits can be paid to. The use of the trust is the most practical way of ensuring these requirements are met. The beneficiaries who could be included are usually your family members and dependants.

The trust is discretionary, allowing the trustees to be flexible in who they pay benefits to. You can however advise the trustees of your intentions by completing a “Nomination Form”. Although this is not legally binding on the trustees, it helps to guide them. Your company will always be a trustee but you will need to appoint an additional one, this could be your company secretary, your spouse or an independent trustee such as your accountant.

Using a trust also ensures that in most circumstances benefits are paid free of both income tax and inheritance tax. (see taxation footnote)

The insurance provider will also provide the trust document which has been specifically designed for this type of cover. There is no charge for this unless of course you decide to seek independent advice.

Are there any restrictions on the type and amount of cover?

Yes, the regulations do place some restrictions on this and the insurance company has it’s own limits. The main ones are:

  • The maximum cover you can have is a very generous fifteen times your remuneration. This can include salary, bonus, benefits in kind and regular dividends that are paid in lieu of salary.
  • The cover must be paid as a lump sum on death before the age of 75
  • You cannot include any additional benefits such as critical illness or disability payments.
  • Apart from that you can choose any term or level of cover you want as well as building in some protection against inflation.

What happens if I change jobs?

If you cease to be a contractor there are two options.

The trustees can appoint the plan back to yourself and you can carry it on as a personal policy. You could also put it under a personal trust for the benefit of your dependants if you wished to.

If you move to an employed role, you could ask the new employer to take over the policy and trust. You will need to change the trustees to your new employer. Likewise, if you went back to being a contractor then the reverse can happen. If the new employer has an existing scheme you wish to join, the relevant lie policy can be carried on alongside it to give you additional benefits.

How do I apply for this policy?

If you would like to receive a call from one of our advisers please request a callback or contact us on 020 8421 7998