Pay for life insurance through your ltd company and save tax
As the Contractor specialist IFA we were chosen by an insurer to help launch a unique policy to the UK market which now means that if you contract through a One Man Ltd company then you can fund individual life insurance through the business without income tax considerations. This allows you to benefit from the death in service cover that you may have enjoyed when working as a permi.
In recent years the benefits in kind rules have been tightened to limit the opportunities to provide personal benefits through your business. However, as previously reported in Planet Contractor, the smallest companies now have the chance to provide death in service benefits for their employees. One Man Ltd’s can pay for this life cover through the business without you paying any income tax so you can save money whilst protecting your family.
Why pay through the company?
Until recently, this employer funded life insurance was only available to large businesses in the form of a ‘group life’ scheme. However, with a relevant life policy, One Man Ltd’s can benefit from the tax deductions that a large employer would enjoy without affecting your lifetime or annual pension allowances.
This is great news for Contractors with a large pension pot as you will still be able to benefit from your current tax relief on pensions contributions and your life cover contributions will offer you a further opportunity to save tax. In almost all cases the benefits wont be liable for inheritance tax as long as they are payable through a discretionary trust that the provider uses.
If you have a spouse that needs life cover then you can tailor the policies to cover you both. This offers greater peace of mind as you know that if anything should happen to you or your partner then your family and estate 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. If you meet these criteria then you and your spouse can be covered for up to fifteen times the total remuneration from the company.
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.
But I already have life cover
You currently pay your life cover from your personal bank account but this won’t be the most tax efficient way of paying for this vital protection. Personally funded insurance premiums are paid for from net earnings that have been subject to income tax rates that could effectively be as high as 60%.
If you are caught by IR35 then your effective rate of tax paid to fund your life cover requirements could be even higher. Paying these essential costs as tax efficiently as possible has the result in making them far cheaper for you.
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 with the Ltd company as the trustee. This not only keeps the money safe from any liabilities that the company has but also makes the fund easier to transfer should you cease to trade under this company name.
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. If they agree to take on the policy then you simply change the name of the trustee to that of your new employer and 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.
If you go back to working permanently for a large employer who is unwilling to fund this policy then the insurer will simply allow you to personally fund your cover again from your net income but without those lucrative tax breaks.
Loading…