Executive Income Protection

Who pays the piper?

For those individuals working for large organisations benefits such as death in service cover and long term sick pay are taken for granted.  As a business owner what are the consequences if you are unable to work?  Whilst an employee may have 6 months full pay and 6 months half pay, you won’t have the luxury of such a benefit unless you set up Executive Income Protection.  Your business plans and lifestyle are supported by you continuing to work and generating a regular income.  What happens if you can’t work due to illness?  Your level of income may fall or stop altogether and your plans for the future may well be in trouble.

Executive Income Protection can be used to protect you and your family and is predominately aimed at limited companies.  The plan is set up in the name of the limited company and premiums are paid by the company.  The business receives corporation tax relief on the premiums as it is a deductible business expense.  There is also no employer national insurance to pay and is not treated as a benefit in kind.

When a claim is made the benefit is payable to the company which in turn pays the employee a salary and/or dividend and payment is taxed in the normal manner.

The advantage of an executive income protection plan compared to personal income protection is a wider range of benefits can be covered. Cover can include:

• Salary
• Dividends
• Employer & employee pension contributions
• Employer national insurance contributions

Having the ability to cover dividends is a distinct advantage as many business owners pay a minimal salary with dividends contributing towards the majority of income.  The ability to cover pension contributions also means retirement benefits can continue to be built up without interruption during a period of ill health.  Any benefit from a personal income protection plan is not classed as taxable earnings for pension contribution purposes; however as an executive income protection plan pays into the company, a salary and dividend can be maintained by the company and retirement plans can continue to be funded.

The gender directive which came into force in December in 2012 has resulted in the cost of executive income protection for females being reduced significantly as insurers could no longer set price based on gender.  This has meant there is an opportunity to save money on existing income protection plans that were put in place prior to December 2012.  This is a worthwhile exercise which can be run quickly and can lead to reductions in the region of 20-25%.

Key Points – Executive Income Protection

• Extremely tax efficient way to provide for income protection cover
• Premiums are paid by the business with no benefit in kind implications
• Premiums can be offset against corporation tax
• Dividends can be covered as well as salary
• Pension contributions and national insurance contributions can be covered
• Potential to save money on female income protection plans set up prior to December 2012

Contact Alterledger

For a review of your current business and advice on forming a limited company please contact Alterledger