Keyman insurance is a policy taken out by a business to ensure their most valuable employees. A lump sum is paid-out directly to the business and this can be used to cover the cost of any profit losses, replacement staff, or loan repayments.
WHAT IS KEYMAN INSURANCE?
What Is Keyman Insurance? Key person insurance is a life insurance or critical illness policy that a company purchases on the life of an owner, a top executive, or another individual considered critical to the business. The company is the beneficiary of the policy and pays the premiums.
IS KEYMAN INSURANCE ALLOWABLE FOR TAX?
Key person insurance is taken out by a company on an individual within the company. The company, therefore, owns the policy and will be the beneficiary of and claim. The premiums are paid by the company and are tax deductible as long as the reasons for cover fit certain criteria which in most circumstances it will.
HOW CAN KEYMAN INSURANCE HELP?
Keyman insurance protects your company from the loss of a key employee due to death or critical illness. It pays out a cash lump sum into the business helping the company to cope with any disruption from losing an employee. It Can help with the following:
The Society for Human Research Management estimates that the cost of directly replacing an employee can run as high as 50 to 60 percent of their annual salary.
Provided a company is taking out key person insurance on an employee for the sole purpose of protecting the business against loss of profits which could result from the loss of that key employee due to death or critical illness, the company may be allowed tax relief on the premiums.
What problems would arise if you lost a key employee or director due to Cancer or death?
Would the company have enough savings to repay loans or finance without this key employee to support and drive the business?
raising finance for GROWTH
What difficulties would the company face in securing finance, given that lenders could lose confidence, knowing that a key person no longer provides a history of security.
HOW IS KEYMAN INSURANCE TAXED BY HMRC?
Conclusively, how HMRC handles this insurance is governed by the intention of the policy and who will gain the benefits. The mandate can be complex and can seem somewhat authoritarian as they rely on how the business proposes to avail from the policy.
Bear in mind, if HMRC taxes the payout, you’ll need to gross-up the payout.
A gross-up is an additional amount of money added to the benefit to cover the income taxes you may owe on the payout from an insurer.
This requires insuring yourself for a larger sum than you require so you’re left with the correct payout after HMRC has deducted tax from the benefit.
I will be happy to assist with this, taking all relevant taxes into account.
HMRC KEYMAN INSURANCE & TAX
The way in which HMRC taxes Key Man Insurance is elaborate. It’s regulated predominantly by a series of principles settled over seventy years ago known as the Anderson Rules.
One of these requirements is the ‘wholly and exclusively test‘. This serves as one of the dominant components that determines if you'll pay tax on Keyman Insurance premiums.
The assessment explores if the payout from the insurance will be ‘wholly and exclusively for the purposes of the company’s trade’, i.e. exclusively for the help of the company. If so, premiums are generally a tax-deductible business expense against the company’s corporation tax bill.