How Relevant Life Cover for Your Employees Can Cut Your Tax Bill (and Theirs)
All employers will understand the challenge of attracting and retaining employees without overspending. The good news is that headline salary, although obviously important, is only one of a range of factors which employees consider when deciding whether or not a job is the right one for them (or whether they wish to stay with a particular employer). Add-on benefits such as relevant life cover can boost the value of a job offer in a very cost-effective way, partly because employers can often negotiate good deals and partly because it is very tax-efficient.
Personal cover in a corporate setting.
Relevant Life Cover is essentially term life insurance taken out by an employer on behalf of a specific employee. To all intents and purposes, it works in exactly the same way as regular life insurance but its tax treatment is very different and much more favourable to both the employee and the employer as it is discounted for the purposes of Income Tax and National Insurance and instead treated as an allowable business expense.
A worked example
Let’s assume that an insurance company charges £200 per month for either personal Life Insurance Cover or Relevant Life Cover and focus purely on the tax situation.
If the employee buys their own personal Life Insurance Cover, then they will have to pay for it out of their net salary, in other words, they will need to earn not just the cost of the insurance, but the cost of the insurance plus the Income Tax and National Insurance payable on their income. If we assume that an employee is in the 40% tax bracket and pays National Insurance at the extra 2% rate, then the effective cost of the cover is actually £344.83 (in other words, the government gets almost as much as the insurance company).
If, however, the employer pays for Relevant Life Cover then this is ignored for the purposes of Income Tax and National Insurance, in other words, it is not classed as a taxable benefit, quite the reverse, it is actually classed as an allowable business expense and hence can be set against profits for the purposes of calculating Corporation Tax. This is currently at 19%, making the effective cost of the cover only £162.
Life cover isn’t just a benefit for older employees
Although life cover is generally regarded as essential for anyone who has a mortgage and/or children, it can be appreciated by people in all walks of life including younger adults in their child-free stage of life who might well feel happier knowing that they could leave something to help parents and or siblings. While “the bank of mum and dad” has become something of a cliche (albeit one grounded in reality), it’s worth noting that older people can be helped financially by their children (or grandchildren).
A note on Key Man Cover
Relevant Life Cover is really a benefit for your employees, although it can, of course, help the business from the point of view of retaining and recruiting staff. Should the policy need to be called upon, the payment will be made to the employee’s chosen beneficiary to assist them in moving on with their life, it will not help the company manage the practicalities of losing a valued colleague. With that in mind, employers may wish to look at Key Man Cover, which is essentially a form of Life Insurance in which the beneficiary is the business itself. Just like Life Insurance, Key Man Cover can be used to help the business move on from its loss, for example by paying for temporary staff until a long-term replacement is found. It is not a substitute for proper succession planning, but can be a useful add-on to it.
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