Company directors and those contracting through their own limited companies have a wide range of insurance options available to them to protect their health and income, including some that are exclusive to such workers.
Executive Income Protection and Relevant Life Insurance – forms of Accident & Sickness Insurance and Life Insurance, respectively – are company paid insurances specifically for directors to consider.
These offer tax-efficiencies over paying for Income Protection or Life Insurance personally and aren’t available to those who don’t work in this capacity.
Meanwhile, another option for your company to pay for is Health Insurance, which provides you with private medical care with the premiums paid for by your limited company.
As a director, you also likely have responsibilities that go beyond yourself and your income, with perhaps staff to consider and the ongoing success of the business resting on your shoulders.
Here protecting the business becomes just as important as protecting yourself – which is where business protection comes in.
Keyman Insurance covers a key individual within the business in case they become critically ill or pass away, paying out funds into the business to be used to mitigate the effects of the loss of that individual.
Shareholder Protection, meanwhile, provides valuable business continuity in the event that a shareholder dies or exits the business through critical illness. It offers ready cash available for the business to repurchase the exiting shareholder’s shares from their estate, providing a lump sum to the absent shareholder or their family.
As a director or someone contracting through your own limited company, it’s unlikely you get any sick pay.
Income Protection can provide sick pay insurance for directors, all paid for by the company as a business expense.
Income Protection for directors can cover both salary and dividends, providing a monthly continuation of income if you can’t work due to illness or injury.
Along with salary and dividends it can also cover wider remuneration from your company, insuring not just wages but even company payments into your pension plan.
EXPERT TIP 🤓
Some insurers will let you also cover your partner’s dividends if they hold a non-revenue generating role within your business (i.e. they wouldn’t continue generating revenue for the business if you were rendered incapacitated through accident or sickness).
If you become ill or injured and can’t undertake your role as a director, Income Protection kicks in to pay out a proportion of your wages (up to 80% of your gross earnings) each month.
The best Income Protection for directors is long-term, meaning it will pay out each month until you either are well enough to return to work or retire, whichever is sooner.
The continuation of income you receive from the policy should you fall ill can be used as you see fit, from covering your rent / mortgage to utility bills, groceries and any other monthly outgoings you have.
When you opt to have your business pay for Income Protection, it’s generally an allowable business expense. This means you’ll usually get corporation tax relief on the premiums.
As you’ll have received tax relief on the premiums, the payout will be taxed on a claim.
The payout goes into your business account and it’s up to you to distribute it from there; it’s at the point of distribution that the income protection payout is taxed as income.
This is unlike personal Income Protection, which is paid for out of post-tax income that you’ve already had tax and National Insurance contributions deducted from. Given you’ve paid tax on the money used for premiums, the payout on a personal policy is tax-free.
There are a number of differences between personal Income Protection and executive cover that it’s worth discussing with an adviser.
For instance, you can insure up to 80% of your income with director cover compared to up to 70% with a personal plan to take into account that tax will be deducted from an executive plan.
Samantha Haffenden-Angear
Business Protection Expert at Drewberry
Life Insurance is there to pay out a cash lump sum in the event of you passing away during the policy’s term.
Many companies offer their employees a Death in Service benefit, which is Life Insurance paid for by the company for its workers.
As the director of your own limited company, you have the opportunity to replicate this benefit with a policy known as Relevant Life Insurance.
Just like personal Life Insurance, Director Life Insurance or Relevant Life Insurance provides a cash lump sum if you pass away during the policy’s term.
Unlike personal Life Insurance, however, the policy is owned and paid for by your business and premiums are eligible for corporation tax relief.
Moreover, paying for the policy directly from your limited company means that you don’t have to pay income tax and employee National Insurance contributions on the sum paid out to you from the company used to pay premiums, offering further savings.
You can insure a multiple of your total remuneration from the business – usually up to 25 times salary and dividends.
Relevant Life Insurance can offer a number of tax savings over paying for a personal policy out of income you’ve already paid tax on.
These tax savings mean you can save up to 49% on Relevant Life Insurance compared to a personal policy.
|
Personal Life Cover
|
Relevant Life Cover
|
|
|---|---|---|
|
Cost to Individual
|
||
|
Monthly Premium
|
£100.00
|
£0.00
|
|
Employee NI Contribution
|
£3.45
|
£0.00
|
|
Income Tax
|
£68.97
|
£0.00
|
|
Cost to Business
|
||
|
Premium
|
£0.00
|
£100.00
|
|
Employer NI Contributions
|
£23.79
|
£0.00
|
|
Gross Cost
|
£196.21
|
£100.000
|
|
Corporation Tax
|
-£37.28
|
-£19.00
|
|
Total Cost
|
£158.93
|
£81.00
|
|
Total Savings
|
49.03% |
|
Relevant Life cover isn’t a P11D or benefit in kind, it’s typically an allowable business expense and the benefit is usually inheritance tax-free thanks to the trust set up at the time the policy goes live.
The specific Relevant Life Insurance trust sees the benefit bypass probate and means it won’t be paid into your estate. If you’ve never set up a trust before that’s fine – the experts at Drewberry are more than happy to help you every step of the way.
Michael Barrow
Independent Protection Expert at Drewberry
Health Insurance for directors can offer faster treatment than the NHS – essential to get you back on your feet and running your business again quickly.
It allows you to skip NHS waiting lists and get treated sooner, in top-notch facilities by private medical practitioners.
Corporate Health Insurance can be paid for by your limited company if you want to run it through the business.
To access your Private Health Insurance, you’ll start with a referral from your GP. From there, medical care is split into two: inpatient treatment and outpatient treatment.
Inpatient care is defined as all care that requires the use of a hospital bed overnight. This is usually related to surgical procedures.
Outpatient care is defined as all care that doesn’t need a hospital bed. This usually refers to treatment such as diagnostic tests and scans, although other procedures can also be performed on an outpatient basis.
All Health Insurance for directors will cover inpatient care as standard. You have the option to add outpatient care – either covered in full or limited to a set monetary value each year – to a policy for comprehensive cover at an additional cost.
You’ll usually need some element of outpatient care – e.g. a scan – before being admitted for inpatient care. Not having outpatient cover means you’d need to wait for this on the NHS, so having outpatient cover can prove valuable.
Although some insurers will allow you to pay for a personal Health Insurance plan with a business bank account there are tax implications.
Keep in mind that Private Medical Insurance is considered a P11D Benefit in Kind when a business pays for a policy on behalf of an employee. This means there’s additional income tax to pay on the premiums being paid on your behalf.
However, there can be some tax-efficiencies by having the business pay for it.
Paying for cover personally requires you to generate more from the company in gross income than the premium because your net income (out of which you’ll be paying premiums0 is reduced by the appropriate taxes from the gross level.
For example, to meet a cost of a £1,200-a-year Health Insurance policy from dividend income taxed at the higher rate (32.5%), you’d need to receive dividends of £1,778.
Then, because dividends are paid net of corporation tax, you’d need to earn £2,195 within the company to pay your Private Health Insurance premiums personally.
As mentioned, Health Insurance paid for through a company is a P11D benefit in kind.
To reclaim the additional tax, HMRC requires employers either to take the owed tax from their employees through their payroll, or declare these expenses at the end of the tax year in order for them to be valued and taxed.
As the business owner, you will also need to pay National Insurance contributions on the premiums, but your business will benefit from corporation tax relief.
So to use a £1,200 premium as an example again, you’d have to pay National Insurance contributions of £166 for a total cost of £1,366, less corporation tax relief of £260.
As an individual, you’d be taxed personally at 40% as a higher-rate taxpayer on the value of the benefit (£1,200) for a total tax bill on your Private Health Insurance of £480.
This would have to be met from dividend income using the same principles as above, requiring you to earn £878 within the company to meet the cost, providing a total bill to the company for your Private Health Insurance of £1,984, marginally less than paying for it personally.
IMPORTANT NOTICE 🧐
These calculations are for guidance only. They are not tax advice. Tax legislation varies depending on your personal circumstances and is subject to change.
Keyman Insurance is a business protection product, meaning it’s designed to protect the business rather than a specific director.
Think about what would happen if you as the director or another key person within the business passed away or became critically ill. Could the business cope in their absence?
The sudden loss of a key person through death or critical illness could have a number of implications for the business, including:
Keyman Insurance provides a cash lump sum into the business in the event of the death (and potentially critical illness, if you add this to your cover) of a key individual within the company.
This will likely be you as the director, but could also be any number of people within the company who are responsible for driving ongoing success within the business, such as key sales people.
Essentially, anyone who has a big stake in running the business and without whom the business would face serious hardship can be covered by this protection.
This lump sum can be used however you see fit to mitigate the after effects of the key person’s absence from the business.
Our Keyman Insurance client – cycling insurer Bikmo – found that Key Person Cover was important not just for director and CEO David George but also for CTO Jorge Ives.
The way Key Person Insurance is taxed will depend on the intended use of the policy. This can be complicated, so we’d always recommend asking your adviser for clarity.
To be eligible for corporation tax relief on premiums, Keyman Insurance needs to pass the ‘wholly and exclusively’ test laid out in tax precedent.
This means the benefit must be ‘wholly and exclusively’ for the business in order for the premiums to be eligible for corporation tax relief.
If a plan benefits anyone other than the business – such the company’s shareholders (including shareholding directors) – then, by definition, it won’t be ‘wholly and exclusively’ for the benefit of the business. For this reason, it’s unlikely that the premiums will be eligible for corporation tax relief.
Meanwhile, payouts on plans that cover the company’s shareholders usually count as a trading receipt, which means that they’ll also be taxed.
As a result, any Key Person Insurance that is aimed at benefitting shareholders rather than the business itself is generally taxed twice – once on premiums and once on the benefit.
It’s different when you’re covering employees rather than shareholders. In this instance, Key Person Insurance is generally regarded as being for the benefit of the business, in which case the premiums should be tax deductible against your corporation tax bill.
However, the benefits will still generally count as a trading receipt (so they’ll be taxed). This means that such policies will need to gross up the sum assured so the business is left with the appropriate figure.
There are yet more different tax rules when it comes to policies aimed at protecting business loans. As the cover benefits the lender (not the business), the premiums can’t be deducted against corporation tax.
However, as the payout from the policy is intended to rebalance the company’s capital account it’s not generally classed as a trading receipt and so isn’t typically liable to any tax. This means that there’s no need to gross up such policies, which naturally reduces the premium.
IMPORTANT NOTICE 🧐
The details above set out the general consensus on how Keyman Insurance taxed; however, we strongly recommend discussing your specific situation with your accountant.
Keyman Insurance is tricky to arrange on your own. Fortunately, our team of business protection experts regularly helps arrange this cover, so we know how to financially value the contributions of vital staff members.
We can also talk you through the complicated ins and outs of arranging protection.
Sam Barr-Worsfold
Business Protection Expert at Drewberry
Shareholder Protection Insurance offers protection both for the business and for the shareholder or the shareholder’s family.
Should a shareholder within the business pass away or become critically ill, the policy pays out a lump sum into the business to be used to repurchase the deceased / absent shareholder’s shares.
It effectively providers the remaining shareholder(s) with ready capital to buy out the absent shareholder’s share of the business, allowing them to retain control of the company.
Should a shareholder within your company die and there’s no provisions for what will happen to their shares, those shares will usually end up as part of their estate and belonging to their family. This could be problematic for a number of reasons:
The risks with critical illness are similar. If a shareholder is so critically ill that they cannot participate in the running of the business, and might not even be able to return to work, they may want to sell their shares to release the cash locked up in them.
If the company doesn’t have the liquid funds to buy those shares, a critically ill shareholder could become a sleeping partner – not contributing to the business but entitled to a share of the profits. Or they could simply sell to a competitor.
Shareholder Protection provides ready cash to repurchase the shares, eliminating the above concerns.
The way Shareholder Protection Insurance is taxed depends largely on how you choose to purchase it and the individual circumstances of you and your company, so it’s always best to seek specialist advice.
Where the individual pays the premiums themselves, premiums are derived from post-tax income and no tax relief is usually available. The benefit is written into trust for the benefit of the other shareholders, which in the most part protects the payout from inheritance tax.
If the company pays the premiums on behalf of the shareholder on an own life basis set up under business trust, the company is typically able to deduct this payment as a business expense for corporation tax purposes.
However, the shareholders would have to pay tax on the premiums, as these would be a P11D or benefit in kind.
Where the premiums are paid under a company share purchase arrangement, these premiums are not typically considered a business expense as they wouldn’t meet the ‘wholly and exclusively for the purposes of the business’ rule, given that the policy isn’t designed to meet loss of profits when the outgoing shareholder dies or becomes critically ill.
As the company owns the policy and makes the policy payments, as well as receives the benefits, there aren’t usually tax implications for the shareholders.
We’d never recommend trying to arrange Shareholder Protection by yourself without expert advice.
There are so many technicalities you’ll need to consider – including cross-option agreements, premium equalisation if there’s a wide age gap between shareholders and potentially trusts – that it’s too easy to get it wrong if you go it alone.
Samantha Haffenden-Angear
Business Protection Expert at Drewberry
There are many types of Business Insurance available for limited companies; which ones are right for you will depend on your needs and circumstances.
For instance, businesses with only one shareholder are unlikely to need Shareholder Protection, although larger one man bands may want a low level of Keyman Insurance to allow for a small lump sum payout to wind up the business in an orderly fashion should they pass away.
Contractors can take out a wide range of insurance options through their limited companies, including:
These are all personal policies that benefit individuals; they’re just owned and paid for by the limited company setup, therefore offering certain tax efficiencies over paying for cover personally.
A business trust is simply a tax-efficient vehicle that’s set up to hold an insurance policy and therefore receive the payout should a claim arise.
It’s necessary for many Director Insurance options where the policy is paid for by the business and the payout is triggered on death, such as:
The trusts acts to not only keep the payout separate from the business, removing any tax liabilities that would arise on having a large lump sum paid into the company, but also separate from the estate of the deceased individual. This avoids them having to pay inheritance tax on the benefit.
Our advisers can talk you through the specific options you have as a company director when it comes to these policies, including any beneficial tax positions you can take advantage of.
We’re here to facilitate the entire business protection process for you from start to finish – it’s what we do every day.
We started Drewberry™ because we were tired of being treated like a number.
We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.
With so many different protection insurance options available for company directors, it’s important to get advice to see which cover would benefit you and your company.
If you need some help don’t hesitate to pop us a call on 02084327334 or email help@drewberry.co.uk.
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