The information contained in this article was correct at the time of writing
March 1, 2024
Relevant Life Plans (RLPs) for tax-advantaged life insurance cover in the UK
Getting Tax Relief on Life Insurance with Relevant Life Plans
Life insurance is an essential part of financial planning, providing financial security for your loved ones in the event of your death. But like most things, it comes at a price. The premiums can add up over time, making life cover seem like an unnecessary expense.
What if you could get significant tax relief that covers some or all of the costs of your life insurance premiums? With relevant life plans (RLPs), you can do exactly that. RLPs provide employers a straightforward way to offer tax-free death-in-service benefits for key employees.
In this guide, we’ll explain everything you need to know about using RLPs to get tax advantages on life insurance in the UK.
Overcoming the Obstacles of Premium Costs
The average life insurance policyholder in the UK spends £160 per year on cover. For those taking out more substantial policies, the yearly costs can run over £500.
That’s all money paid out of your net income after taxes. It can be especially difficult to budget for when you’re young and healthy. Why spend so much protecting against something that probably won’t happen anytime soon?
But unexpected tragedies can happen at any age. And term life premiums only get more expensive as you get older. By putting off getting covered, you risk making life insurance unaffordable right when your dependents would need it most if something happened to you.
With an RLP, you can provide valuable life cover now while significantly reducing the net costs through tax relief.
Understanding Relevant Life Plans
Relevant life plans are employer-sponsored life insurance policies governed by HMRC rules that make premiums tax-deductible. They provide cost-effective death benefits to employees without requiring you to set up a full pension plan.
Introduced in 2013, RLPs offer a flexible alternative to excepted group life policies. Key employees and business owners can take out individual RLPs on their own lives with no requirement to cover all staff.
The technical specifications include:
- Available only to employees – owners, partners, and directors cannot take out personal RLPs
- Covers death benefits only; no cash value build up
- Caps death benefits at £320,000
- Must meet “wholly and exclusively” business expense rules
With an RLP, the business pays the policy premiums on behalf of the employee. The employee’s beneficiaries then receive tax-free death benefits if the covered individual dies during employment.
By structuring life insurance through an RLP, both employers and employees get significant tax savings compared to personally-owned cover policies.
Tax Benefits for Employers
When taken out for an employee, RLP premiums count as a business expense. Employers can claim full corporation tax relief on the yearly premiums just like with other employment costs.
In monetary terms, a company paying £500 in yearly RLP premiums would effectively reduce its pre-tax profit by £500. At the 19% corporate tax rate, this results in £95 in actual tax savings.
So that £500 of life insurance cover actually only costs the business £405 out of pocket. This makes offering RLPs very cost efficient for delivering extra benefits to recruit and retain key staff.
Companies can also claim capital allowances tax relief on setting up the RLP based on actuarial and legal fees incurred. This provides another way to realise helpful first-year tax reductions on the plan.
Tax Advantages for Employees
From the employee’s perspective, RLP premium payments by the employer constitute a non-cash benefit. These premiums get excluded from calculations for income tax and employee National Insurance contributions (NICs).
So not only does the employee gain life cover funded by their company, but they avoid paying any taxes on this additional employment benefit. With personal cover policies, the same premium costs would come out of already-taxed income.
The tax-free treatment also applies to the death benefits ultimately paid out from an RLP. The named beneficiaries receive the full lump-sum payment with no deductions for inheritance tax or other levies.
For higher- and additional-rate taxpayers especially, RLPs provide a much more tax-efficient way to secure valuable life insurance compared to buying consumer policies. Between the premium tax relief and tax-free payouts, it really makes a difference.
Realising the True Value of RLP Tax Relief
Just how big can the tax savings get with an RLP compared to normal life insurance? Let’s take a look at some examples.
We’ll assume a small business owner named Sarah pays £400 per month to cover a key employee named Mark through an RLP. That’s £4,800 per year in premiums paid pre-tax by the business.
If Sarah leaves the RLP premiums as a business expense, she saves 19% x £4,800 = £912 in corporation tax savings. If she takes £400 per month as a personal dividend instead, the amount she has left to pay Mark’s premiums reduces to £4,032. So she still saves business taxes as well as Mark’s personal income taxes on the premiums.
Now let’s imagine Mark chose to get the same level of cover through a personal life insurance policy. As a higher-rate taxpayer paying 40% on income above £50,270, he would have to earn £8,000 pre-tax just to have enough left over to pay the £4,800 yearly premiums.
By using an RLP to gain tax relief, Mark and Sarah save a combined £4,768 per year compared to no tax relief. That’s enough to pay for more than half the RLP premiums!
Over several years, the tax savings really start to add up. RLPs make premium costs much more manageable for both companies and employees alike.
Getting Covered with an RLP
Hopefully you can see how using relevant life plans can make getting life insurance coverage more affordable thanks to tax relief. But how do you actually set up an RLP for your business?
The first step meet with a financial advisor or life insurance broker that offers RLPs. They will walk through all the particulars based on your situation, including:
- Determining the right level of death benefits
- Recommending an appropriate insurer and policy
- Making sure you meet “wholly & exclusively” tax rules
- Completing any required medical checks
- Handling applications and paperwork
Like other life insurance, RLP policies require the employee to pass underwriting. But as an employer-sponsored program this can help secure preferential ratings.
Once issued, the business then pays the agreed RLP premiums on the employee’s behalf. As long as they remain employed, the employee enjoys increasing life cover funded tax-free via the company.
For companies wanting to enhance their benefits offerings, RLPs provide an affordable way to safeguard your most important team members. The tax advantages make them very cost effective for employers to take out.
Employees should also motivate their companies to arrange RLPs. With premium tax relief, you can gain substantial life insurance protection funded out of gross pay before taxes. That leaves more personal income available to spend or save/invest.
Securing Your Financial Future, Tax-Free
While often overlooked, relevant life plans can be hugely beneficial for both companies and their employees seeking tax-advantaged life insurance. With higher policy costs every year in the UK, maximising savings through an RLP is an effective way to secure essential death benefits.
Take the opportunity to discuss RLP options with your financial advisor or life insurance broker. Get ahead of increasing premiums costs and gain reliable cover for your family, all while potentially realising substantial tax relief that won’t be available later.
By putting an RLP in place now, you can gain peace of mind knowing your loved ones will be financially protected no matter what unexpected tragedies the future may hold. Don’t leave it to chance or until it’s too late – make sure you have affordable life insurance in line and ready to go.
Your financial future and family depend on it!
