Will your life cover create a big tax bill?

James MacAulay

James MacAulay

Technical Manager

Many people are unaware that the death in service they have as a condition of their employment could be subject to a 55% tax charge if they pass away.

Their loved ones could therefore be in for an unpleasant shock, on top of the stress of having to deal with a recent bereavement.

This is due to most claims from these schemes being treated as pension payments. This means that the amount of the payment is added to your other pensions before being tested against the lifetime allowance.

We covered the lifetime allowance in an earlier blog. In basic terms, most people are restricted to saving £1m into their pensions over the course of their life.

Above this level, lump sum payments will be taxed at 55%.

Our team regularly review these schemes and the majority of cover is based on four times salary. Therefore, those on £100,000 a year will only have £600,000 of lifetime allowance remaining for their pension.

What can be done?

By planning now, you could try to avoid this;

  1. If you have not saved into a pension scheme since 6 April 2016 you can register for a higher lifetime allowance of £1.25m.  This is an extreme option though as you or your employer will not be allowed to make any further pension savings, without losing this protection.
  2. Alternatively, another option for those who are willing to engage with their remuneration/HR department is a ‘Relevant Life Policy’ which has the following benefits for employer and employee:
  • Contributions can be paid by your employer without it being treated as a benefit in kind for the employee
  • Contributions are normally treated as an allowable business expense for corporation tax purposes
  • No National Insurance Contributions on the premiums or benefits
  • When structured properly can be paid free of tax
  • Benefits don’t count towards annual or lifetime pension allowances

These are not suitable for everyone and specialist advice is required to ensure that your objectives are achieved.

To find out whether this could work for you, or if you would like to discuss anything in this article, please contact a member of our Wealth Team by email on enquiries@jcwealth.co.uk or your usual local office Financial Planner.

All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change, and are dependent on your individual circumstances.

Nothing in this blog constitutes advice to undertake a transaction and professional advice. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

Disclaimer: While all possible care is taken in the completion of this blog, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained in this blog.