Summary

Thanks to a loophole in the Finance Bill announced in the spring 2006 budget, some life insurance policies will benefit from tax relief. This article explains what this means to you.

Budget finance loophole means tax relief on life insurance

In every budget, there are upsides and downsides. This is one of the upsides, where the new Finance Bill makes it possible for some life insurance policies to offer tax relief to customers. This is not a retrospective measure however, only new policies completed after the budget can offer the benefit.

Those that are eligible will save money to the tune of 5% -15% for taxpayers who pay at the standard rate, and up to 30% for those that pay higher rate tax.

The rules are quite strict on the type of policy that can benefit. For example, it must be a straight life insurance policy, you can't have critical illness insurance on there too. You must also fix the sum to be insured at the outset, and it must also be for a single life only. The tax relief is not available for joint policies. If you can meet the above criteria then you may well save money with one of these policies.

Other restrictions that apply to these policies but will not affect many people are:

•  Life insurance premiums and pension payments that amount to more than £215,000 a year are not eligible.

•  A combined pension fund and life insurance payout value of more than £1,500,000 will be taxed at 55% on the excess. Conventional policies are not subject to this particular rule.

How does it work?

Standard rate taxpayers will have the tax relief calculated automatically by the life insurance company, so they will pay lower premiums with the tax relief already applied.

Higher rate taxpayers pay the premium in full and can either claim the tax relief back using a self-assessment tax return form, or contact the tax office and have their tax code amended so it applies the tax relief automatically.

Not all life insurance policies will integrate this new tax relief system. You have to specifically choose a tax relief policy, and they will generally cost more to offset the extra costs associated with administering the tax relief, and extra rules they will have to work to because of the Inland Revenue. The question is, will you save money if you take out a policy with tax relief or not? The only way to find out is to have a broker or insurer do the calculations for you.

There are a few possible downsides, for example the Chancellor could decide to change the legislation again so that these new policies are not able to offer tax relief. However we find this scenario extremely unlikely. Your savings would also be affected if your level of income changes and you move into a lower tax bracket.

To find out more about the savings you could make then you need to talk to a professional. You can't apply for these policies online, so you will have to call and speak to an advisor over the phone. Different companies have different names for these policies, and they are variously known as Life Insurance with Tax Relief, Life Protection with Tax Relief and one company is even choosing to call it Pension Term Insurance - but they all mean the same at the end of the day. And just so you are sure, this life insurance is entirely separate from getting a pension, you don't have to buy the two together to benefit.

Life Assurance

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