Employers are being urged to restructure their group life assurance arrangements so that the maximum lump sum paid out on death falls below the lifetime tax allowance limit of £1.5m.
Ian Bulman, an associate director at the professional and financial services group Smith & Williamson, explained that to help protect the recipient of the death-in-service payment from tax charges, companies with high earners where the life assurance at four times salary exceeds £1.5m, should restructure their scheme to ensure the payment does not exceed this amount.
"There are two issues here. First of all, if [life assurance of] four times an employee’s salary equates to a lump sum of more than £1.5m, the excess above £1.5m would be subject to a tax charge at 55%. [This] lump sum benefit [would] also count against the lifetime allowance of the individual to whom the payment is made," he said.
Anything above £1.5m should be used to purchase a dependant’s pension, which doesn’t count towards the recipient’s lifetime allowance because income tax is paid on it. "As a matter of some urgency, employers should look at their schemes to ensure they have covered off such issues," Bulman added.