Life insurance premiums paid by employers to provide death benefits for their workers will be tax-exempt regardless of the beneficiary of those benefits, under proposed HMRC legislation
Currently such premiums are only tax deductible if the beneficiary is a spouse, close family member or member of the employee’s household.
The move, which also affects employer contributions to qualifying recognised overseas pension schemes (QROPS), will mean that any individual or registered charity can be nominated as a beneficiary without employer contributions being treated and taxed as a benefit in kind.
When an employer provides for death benefits through a life assurance policy or provides retirement benefits through a QROPS, the employee will usually name a beneficiary to receive any payment due upon their death, and may be able to name a beneficiary to receive their retirement benefit.
Premiums paid into these schemes by the employer are currently only tax-exempt if the beneficiary of the employee’s death or retirement benefit is the employee, a member of the employee’s family, or a member their household.
The current tax definitions of family and household only covers the employee’s:
• spouse or civil partner
• parents
• children or other dependents
• domestic staff
• guests
If the beneficiary is not a member of the employee’s family or household, the premiums paid by the employer are treated as a taxable benefit in kind.
Announcing the move, HMRC officials said: ‘This exemption will be updated to ensure the tax system remains relevant and fair. Extending the exemption to include any individual or registered charity as beneficiary, will provide equal tax treatment regardless of the beneficiary’s relationship to the employee.
Extending the exemption to allow employees to nominate a registered charity is consistent with the government’s policy of providing tax relief on charitable donations.’
Legislation will be introduced in the Finance Bill 2018 to 2019 to amend section 307(2) of chapter 9 of part 4 of The Income Tax (Earnings and Pensions) Act 2003.
‘Subsection 1 amends section 307(2) to widen the scope of the exemption to allow the employee to name any individual, or a charity, as the beneficiary of the employee’s death in service or retirement benefits. The employee will not be liable to income tax as a benefit in kind on contributions paid in these circumstances,’ said HMRC in an explanatory note.
Reform of employer contributions into life assurance and overseas pension schemes is here.
Report by Rob Munro
