Stretching your tax free income with this life cover

Here’s a good way to stretch your tax-free investment allowances even if you have used up you ISA and pension limits for the tax year.

Expats who are still UK taxpayers can invest some extra cash tax free in to a ‘relevant life plan’ by including the policy in their employment benefits package.

The policies are standard life or critical illness cover – but come with the tax free benefit.

Any IFA can set up a relevant life plan – but make sure the policy is written in trust to take advantage of the maximum tax benefits.

Most major life companies offer the policies as term life cover with a sum assured of around £10 million.

To find out more, read the answers to these frequently asked questions:

Relevant life plans explained

It’s a life policy which pays out a cash amount on death or diagnosis of a terminal while the policy is running. They are like any other life protection policy, but have the added bonus of cutting tax that makes the cover much cheaper than that offered by a standard policy.

What will be the tax reliefs?

Premiums for relevant life plans are an allowable business expense –so if the policy is added in to a benefits plan, the employee pays no income tax or national insurance on the premiums and the employer can set off the amount in the company accounts.

Will this affect an employee’s pension contributions?

No, a relevant life plan is insurance, not a pension, so any premiums are discounted as pension contributions.

Is the lump sum taxable?

No. Providing the relevant life plan is set up as a discretionary trust, the sum assured paid on death or diagnosis of terminal illness is not taxable as income or an inheritance.

Who can benefit?

A relevant life plan is sole life cover for a director or employee. Cover is usually a multiple an employment package –which includes salary, bonus, benefits and dividends paid by the employer.

Who cannot benefit from a relevant life plan?

There has to be an employer/employee relationship, so sole traders, equity partners or equity members of a limited liability partnership are not be eligible for the plan. It’s also not possible to offer joint policies for spouses or partners.

Relevant life plans offer a tax efficient way of providing an excellent level of life cover, but few employers know about them.