Tax Efficient Directors Insurance
At Saint Global, we work with Directors to ensure they are maximising every avenue of their business from their systems and processes, business development and even tax tips. This guide is to highlight which Insurances that you can pay through your business, that can protect you personally, your business and reduce your Corporation Tax Bill!
Every business has something in the business whether it skills, knowledge, or experience, make a big contribution to its success. And if lost, there could often be an immediate financial impact. Many businesses consider the employee benefits they offer, yet may overlook the need to protect the business. Perhaps some companies aren’t fully aware of the risks, let alone the solutions.
Executive Income Protection
Executive Income Protection can help Directors by protecting the business against the financial impact of an employee becoming ill, injured or unable to work. It can even be used to fund ongoing employee Statutory Sick Pay so you can meet your financial obligations whilst not relying on your bank balance.
You can also extend this cover to include:
- Salary
- Dividends
- Overtime/Bonuses
- Employer pension contributions
- National Insurance contributions
- P11D benefits
- Spouse/registered civil partner earnings and dividends
What are the maximum benefits from Executive Income Protection?
- 80% of the employee’s annual earnings up to £300,000 (Level) or £210,000 (Increasing plans)
- Employer pension contributions max £40,000
- Employer National Insurance max £42,500
What are the age limits?
- Maximum age at expiry is 70 years old, 65 for driving based occupations and 50 for fitness instructors/ dance teachers.
How does Executive Income Protection work?
If you claim against the insurance, the money paid will be treated as a trading receipt (income). However, when the funds are paid out i.e. to fund sick pay for an employee, this is treated as a trading expense so the overall tax position is neutral.
Key Person Protection/Key Person Income Protection
Key Person Protection is the worst case scenario to protect a business against a loss of a key person in your business. It helps compensate for the loss of their skill, experience or leadership.
Similar to Executive Income Protection, in the event of a claim, the funds would be paid directly to the business which can be used to replace the key person, cover lost profits or assist in keeping the business trading.
Who counts as a key person?
A key person is someone in the business whose skill, knowledge and experience or leadership contributes to the continued financial success. This could be:
- Owner/Founder
- CEO
- Managing Director
- Operations Manager
- Marketing Manager
- Computer Specialist
- Sales Manager
- Employee with lots of contacts
- Exceptional talents
What does it help protect?
- Loss of profits
- Having to recruit or train a replacement
- Loss of important personal or business contacts due to a key person not being there to main a contract
- Customers and supplies losing confidence in the business
- Outstanding loans.
The key is to show the business is due to suffer a financial loss due to the key person's death.
How can the proceeds be used?
- The ongoing trading of the business (compensates reduction in profits)
- Meeting the cost of hiring/training a replacement
- Support for ongoing loan payments
How do you calculate the amount of cover needed for Key Person Insurance?
Method 1
Take a multiple of the key person's earnings which is often up to 10 times for death and a lower figure for critical illness. This takes into account the cost to the business for replacing the key individual (finding a suitable replacement, training etc)
Method 2
Calculate the amount of cover based on their contribution to profits:
- Up to x2 proportion of gross profit directly attributable to the key person
- up to 5 x proportion of net profit directly attributable to key person;
- (key person salary/total payroll for business) x gross profit x recovery period (max five years).
Method 3
The amount of the loan to be repaid on the death of the key person.
What happens if the key person leaves or retires?
- You could stop paying the insurance premium and the policy would lapse
- Continue paying the insurance premiums until end of policy and in the event of a claim, the business would receive the proceeds.
- Assign the policy to the key person who would become the key owner of the policy and has the option to continue paying the insurance personally.
- Where a partner is a key person and the policy is written in trust, the policy would automatically revert to the key person. The taxation of this can be complicated, for both the company and the life insured. National Insurance, Capital Gains tax may all need consideration. We strongly recommend that you speak to a tax specialist.
Why consider Key Person Protection?
- Profit Protection
Key persons can often be responsible for a significant portion of the profits. Protecting them can provide the business assurance that if anything happens, the business is protected.
- Replacement Cover
Finding a replacement for someone can be difficult, this cover gives you the option to cover the cost of finding or using a temporary replacement.
- Loan Protection
Key Person Protection can cover part of the loan repayments including interest for a business mortgage or loan (which relate to the contribution of the key employee)
Shareholder Protection
Shareholder protection enables the surviving shareholder/s to purchase the deceased owners share of the business and ensures the deceased owners dependents have a buyer and cash instead of shares in business.
One of the requirements of the policy to be written into a trust, with one agreement covering all owners. Specialist advice is likely to be required to set up this protection correctly and advice around taxations involved including inheritance tax, capital gains tax and income tax.
The agreement can be activated upon:
- Death
- Terminal illness cover
- Critical illness cover
If an owner leaves the business the agreement will normally cease to apply to that owner only.
Relevant Life Plan
Relevant Life Plan is a tax efficient way to have life insurance paid through the business tax efficiently. Premiums can be treated as an allowable business expense by HMRC. With Corporation tax relief available, no additional income tax or National Insurance to pay.
Why Consider a Relevant Life Plan?
- Tax efficient way to provide life insurance with terminal illness cover benefits
- Cost effective as paid through the business instead of personally
- Premiums are classed as a business expenses therefore allowable expense against corporation tax
- The plan is written into a trust as such any premiums are paid outside of their estate which can be beneficial for inheritance tax purposes.
What happens if you leave the company?
- The policy can be transferred to the new employer (keeping the Relevant Life Plan status going)
- The employee can continue the policy but it would lose its Relevant Life Plan status.
How much can you be covered for under a Relevant Life Plan?
Age 17 to 49 = up to 25x your remuneration package
Age 50 to 59 = up to 20x your remuneration package
Age 60 to 73 = up to 15x your remuneration package
Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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Written by the team at:
Saint Taxation
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