Pay your life insurance through a limited company and save tax!
One Man Ltd company Contractors can fund life insurance through the business and, for the first time, have no income tax or benefit in kind considerations of any kind. It may also be possible to have this payment treated as a business expense.
A ground breaking new product allows you to protect your dependents in a way that mirrors the death in service benefits that you used to have as an employee of a large corporate and at the same time save you significant amounts of money when compared to more mainstream policies…
In recent years the ‘benefit in kind’ rules have been tightened to limit the opportunities to provide personal benefits through your business. Against this tide a recent change in legislation means that smaller companies now have the chance to tax efficiently provide death in service benefits for their employees. The benefit for a Contractor using a One Man Ltd company is that you can transfer the cost of life insurance to your business rather than find the cost personally from your post-tax income.
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 realistic as an option for Contractors
Instead Contractors would previously have paid personally or sought ‘Keyman’ insurance, paid for by the company but this too was often inappropriate. With ‘Keyman’ cover any payout on death invariably belonged to the company and so the business or your dependents could ultimately be taxed upon receipt of the funds.
This innovative new product is aimed squarely at SMEs and provides a multiple of earnings (salary or dividends) as death in service benefit whilst possibly enabling you to exploit the tax deductable nature of the premiums that a large employer would enjoy.
The new product essentially works the same as the old pension term assurance but does not affect your lifetime or annual pension allowances. So those Freelancers with a large pension pot are still be able to benefit from the lucrative tax relief on pensions contributions whilst your life cover contributions now offer you a further opportunity to save tax.
An added bonus is that in most cases the benefits wont be liable for inheritance tax as long as they are payable through a simple discretionary trust.
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 Man Ltd 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 tax mans pockets and could offer you substantial savings on any existing life cover that you pay for 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 know that if anything should happen to you or your partner then 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. 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.
Example – if they receive £5,000 salary and £40,000 in dividends per year 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 age 75 and can offer you the 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 Man Ltd company?
The good news is that even if you decide to hang up your Contracting hat and return to permanent employment, you can still benefit from the tax savings by simply transferring your policy to your new employer. Your cover is kept in trust and this not only keeps the money safe from any liabilities that the company has but also makes the plan easier to transfer.
When you come to transfer your life cover, you will need to ask your new employer if they will take on the policy and become a trustee or whether you would have to transfer to their group life scheme. If they agree to take on the policy then you simply change the name of the trustee to that of your new employer and they continue to make contributions. If at any point you decide to go back to contracting as a One Man Ltd company then you can simply make your new Ltd Company the trustee.
You can also pay the policy personally. 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.
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 for 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.
Help when you need it most
If you don’t yet have insurance or currently pay for life cover personally then this is undoubtedly the policy for any One Man Limited Company Contractor. The advisers at ContractorFinancials can handle the whole application process for you, from setting up the policy initially to transferring it to a new trustee 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 applying as easy as possible. Our award winning protection adviser Samantha Foster can take your details over the phone in a matter of minutes and will handle the whole process for you until you are on risk with the protection that you need.