How life-insured contractors can save tax
Contractors running their own limited company can fund life insurance through their businesses and, for the first time, not have to consider income tax or benefit-in-kind, writes Tony Harris, of freelancers' IFA ContractorMoney. It may also be possible to have this payment treated as a business expense.
This allows you to protect your dependents in a way that mirrors the death-in-service benefits you might have once enjoyed as an employee of a large corporate and, at the same time, can save you significant amounts of money when compared to paying mainstream policies from your personal bank account.
In recent years, the ‘benefit-in-kind’ rules have been tightened to limit personal benefits through your business. Against this tide, a recent change in product design means that smaller companies now have the chance to offer tax-efficient death-in-service benefits to their employees. The benefit for you as a contractor working through a one-person limited company is that you can transfer the cost of life insurance to your business, rather than fund the cost of it personally from your post-tax income.
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What are the tax benefits?
Until recently, employer-funded life insurance was only available to large businesses in the form of a ‘group life’ scheme for all employees. With a minimum number of insured persons and prohibitive cost, this was not a realistic option for contractors.
Instead, contractors would have had to pay the premiums personally or seek out ‘Keyman’ insurance paid for by the company, but this too was often inappropriate. With ‘Keyman’ cover, any pay-out on death invariably belonged to the company and so your dependents could be taxed on the receipt of the funds.
An innovative new product called Relevant Life is aimed squarely at small companies and provides a multiple of earnings (salary or dividends) as death-in-service benefit, while also enabling you to exploit the tax-deductable nature of the premiums that a large employer would enjoy.
The new product essentially works like the old pension-term assurance, but does not affect your lifetime or annual pension allowances. So those contractors with a large pension pot are still able to benefit from the lucrative tax relief on pensions contributions, while your life-cover contributions are now catered for separately.
An added bonus is that the benefits in the event of your death won’t be liable for inheritance tax as they are payable through a simple discretionary trust, thereby providing a further tax-saving opportunity.
Who can use the policy?
Any small business owner can take out the cover, but it is particularly relevant for Contractors operating through a one-person limited company because of the tax savings it offers you personally. Putting the monthly premiums through your company is a much more palatable option than lining the taxman’s pockets, and could therefore offer substantial cost savings on any existing life cover that you pay personally.
If you have a partner who receives an income from the company, then you can tailor the policies to cover you individually. This offers complete peace of mind as you then know that if anything should happen to you or your partner your family will be protected. The only requirement is that your spouse must be an employee of the company, for example a company secretary, and must receive some form of remuneration (i.e. salary or dividends).
Is there a limit to the death-in-service I can provide?
The policy can cover you or any partner who earns salary or dividends for up to fifteen times your total remuneration from the company.
For example if they receive £5,000 salary and £40,000 in dividends p.a. then you could be covered for up to £675,000.
This business life cover will pay out a lump sum in the event of your death up to the age of 75 and can offer you peace of mind that your family, an individual or a charity of your choice, will be looked after.
What happens if I cease trading as a one-person limited company?
The good news is that even if you decide to hang up your contracting hat and opt for permanent employment, you can still maintain the cover by simply transferring your policy to your new employer. Your cover is written in trust, which means that not only is the money safe from any liabilities that the new company has, but also makes the plan easier to transfer.
Alternatively you can pay the policy personally and this means that, unlike traditional death-in-service cover that is non-transferrable by the employee, this policy can be kept in place, irrespective of who you work for. If at any point you decide to go back to contracting via a one-person limited company, then you can simply make your new limited company the trustee.
This is vitally important because clients who suffer health problems may well be uninsurable and will therefore be reluctant to leave an employer because they know they will lose the safety net of the employee benefits package. Because this cover is transportable between employment types and between individual companies, it really can stay with you all your working life. Irrespective of any health issues that arise, you will not be medically underwritten again with this cover, and so the cover can remain intact, providing continuity to the protection your dependents need using what can be a highly tax efficient arrangement.
Help when you need it most
If you are a one-man limited company contractor and don’t yet have insurance, or if you currently pay for life cover personally, then this could be the policy for you. Our advisers can handle the whole application process for you, from setting up the policy initially, to transferring it to a new employer or helping your family to make a claim if the worst should happen.
We realise that your working day as a contractor can be hectic, so we have made the application process as easy as possible. Our protection advisers can take your details over the phone in a matter of minutes and will handle the whole process for you until your policy is in place and you have the protection that you need - just call 03450 628888.
Or simply click here for more information or a quote.