Contractors – now you can pay life insurance through a limited company AND save tax!

Contractors – now you can pay life insurance through a limited company AND save tax!

Freelance contractors can now, for the first time fund life insurance through their limited company and not have it treated as a benefit in kind.

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 your partner, kids or other family members 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 limited companies. This has meant that you have had to fend for yourself and pay for this cover from your own back pocket with after tax money.

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 and limited company contractor. 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?

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.

There are no National Insurance consequences for you or the company.

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 schemes, Relevant Life policies do not form part of your annual or lifetime allowances for pension purposes.

Who can use this policy?

Any small Limited company business owner can take out this policy but it is especially appropriate for Contractors and Freelancer workers operating through a one person Ltd company because of the tax savings it offers. Paying the monthly premiums through your company makes financial sense when compared with personal life assurance policies paid out of net income. A contractor spending £30 net every month on a policy has to earn in excess of £50.  There’s also good news for those contractors who have a partner that receives remuneration (i.e. dividends) from the company – they too can apply for a relevant life policy. The only requirement is that your spouse must be an employee of the company, for example a company secretary.

Is there a limit 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 or any partner 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.

Example – if they received £4000 salary and £36,000 in dividends that year, then you could be covered for up to £600,000.

The life cover will pay a lump sum on death up to 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.

John Yerou is the Managing Director of Freelancer Financials.
© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited

Image: I’m feelin’ kind of lucky tonight by Rawheadrex

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