Legislation update – Employers urged to revamp group life

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.