For an SME business owner, the personal bank account is the one with the highest tax burden. Any funds in their personal account will likely be liable to corporation tax, and tax on dividends. With personal tax on dividends increasing from April 2022, and new higher Corporation Tax rates set to apply from April 2023, it is now more important than ever to look for legitimate means of saving tax.
Many business owners have mortgages, borrowings, partners, kids, etc… and quite sensibly take protection in the form of a life insurance policy. Almost every time these are taken out, premiums are paid from their personal bank account.
So, a business owner paying say £100 premium, from net income, is wasting money that could be redirected back into pension, or taken as dividend and used for a night out!
When personal tax on dividends rises next month (April 2022), up to 33.75%, the total cost to the Ltd Company of them paying £100 life insurance premium is c£186. The extra £86 is Corporation Tax £35 and £51 Personal Tax.
Life cover for business owners – How you can save money with Relevant Life Policy
It is however possible to pay the £100 from the Ltd Co, 100% Corporation Tax deductible and with no personal tax liability, saving the £86. Simply moving it from your personal bank account is like giving yourself a pay rise. As a 40% taxpayer, under PAYE the total cost of receiving £100 net is £188, with employer National Insurance at 13.8%, and a 41% deduction for income tax plus 1% Employee National Insurance.
The correct way to pay life cover for business owners is via the Ltd Co bank account, using a type of term assurance policy called a ‘Relevant Life Policy’. Premiums are are the same as any other term assurance offered by an insurance company, they are Corporation Tax deductible, and it is also possible to include critical illness cover.
However before you jump in there are some important factors to consider;
- It can only be a term assurance
- No investment content
- and it cannot run beyond the age of 75
Want to find out more about Relevant Life Policy?
At Modus Accountants we work with Thompson Tobin Financial – A specialist provider of high-grade financial advice to UK small to medium sized businesses Owners/Managers, and successful private individuals. Thompson Tobin Financial are experts when it comes to life cover for business owners, and we’re confident that if you are interested in finding out more they can support you.
To arrange a session with their team – Simply fill in your details below and we will put you in touch.