Can my limited company pay for my director’s life insurance?

One of the things that company directors need to think about, and actually anyone even taking steps to being self-employed should be aware of; is what benefits will you give up -- if you were previously a permanent employee.

Being employed, it’s easy to take for granted ‘nice to haves’ like death-in-service benefits. These provide extra cover to protect our families at the worst possible time.

Contracting isn’t the end of the line for death-in-service benefits

But just because you now work for yourself, potentially through a limited company, that doesn’t mean there aren’t options available to provide yourself with this same benefit. And what’s even more appealing is that with the right life insurance policy in place, this benefit can indeed also be tax-deductible, writes Angela James, founder of Yolo Wealth.

Company directors have various options when it comes to life insurance. But there is one particular policy – Relevant Life Insurance -- that can provide you with a level of cover that’s not only based on your salary but also your dividends. As a result, you won’t get penalised for taking most of your income as dividends.

Tax-deductible, and tax-free

These type of life insurance policies can be complex and there are rules that must be adhered to that ensure the policy is a tax-deductible expense. Fortunately though, not only will it be tax-deductible from the outset, but the benefits paid out in the event of a claim to your family are also tax-free.

Paying for private policies is of course fine, and in some instances that is the appropriate thing to do. But to enable you to pay for these private policies, you need to draw down the dividend income to pay for them. Remember, paying for life insurance from your limited company can really drive down the net cost of your insurance.

An example

  Standard Life Policy Relevant Life Insurance
Annual Insurance premium £500pa £500pa
Employee Tax    
National Insurance £0.00 £0.00
Income Tax £40.54 £40.54
Employer Tax    
National Insurance £0.00 £0.00
Corporation Tax £126.79 -£95.00
Total Cost £667.33 £405.00
39% Saving compared to ordinary life policy   Saving £262.33pa

Not to be sniffed out

Should you think that you will inevitably have your life insurance for many years, this 39% is a significant saving to be had! With the tax burden increasing and the costs of living soaring, it is very much worth being aware of any additional savings you can make on the day-to-day things that you pay for. And we’d suggest life insurance should be included in those things!  

Of course with life insurance, it’s often not just about you. So, if you feel you don’t have sufficient life cover in place for your family, and you do run a limited company, then this type of cover should certainly be your first consideration. Don’t be deterred by the fact that as a contractor, your work is interchangeable. In this instance, you needn’t worry about that -- insofar as should you need to close your limited company, you are able to retain your policy and covert it to a personal plan.

Reach out, even if just reviewing your contractor life insurance

There are additional issues to be aware of with life insurance as a contractor who pays for their cover directly from their limited company. Even the above transfers aren’t always easy. So, especially with something as important as life insurance, it is always worthwhile seeking advice from a reputable and experienced adviser, even on seemingly straightforward matters like reviewing an existing policy or setting in place a new insurance, particularly if tax-efficiency is also a key consideration!

Tuesday 19th Apr 2022
Profile picture for user Angela James

Written by Angela James

Angela is the managing director and senior adviser at Yolo Wealth our chosen advice partner. She has over 16 years’ experience in the industry, having spent the last 9 years specialising in advice to contractors and freelancers, and has worked in partnership with us during all that time.
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