it contractor relevant life insurance

Life insurance for IT contractors working via a limited company

Life insurance for IT contractors working via a limited company

Independent contractors often provide their services through a limited company, commonly referred to as a personal service company. This structure is widely used across the UK contracting market, particularly in sectors such as IT, engineering, consulting and project delivery.

Where a contractor operates through their own company, life insurance can often be arranged in a more tax efficient way than buying a personal policy.

A relevant life policy allows a limited company to provide life cover for a director or employee. The company pays the premiums and any benefit is paid to the insured person’s beneficiaries through a discretionary trust.

For contractors who operate through their own company, this approach can make the cost of life cover significantly lower than arranging insurance personally.

This guide explains how life insurance works for contractors operating through limited companies, including:

  • IT contractors working through personal service companies
  • consultants and project specialists on contract assignments
  • engineering and technical contractors
  • freelancers invoicing clients through their own company
  • contractors paid through a mix of salary and dividends

If you are new to the concept, you may wish to start with our main guide: what is relevant life insurance?

Table of contents

Why contractors use limited companies

Many contractors operate through a limited company when providing services to clients or recruitment agencies. This company structure allows the contractor to invoice for their work and manage their own finances.

Typical contractor roles include:

  • software developers and IT engineers
  • cybersecurity and cloud specialists
  • project managers and programme consultants
  • engineering and infrastructure specialists
  • independent technical consultants

The contractor usually becomes both director and employee of the company. Income from contracts is paid to the company, and the contractor then pays themselves through salary and dividends.

This structure allows the company to provide certain employee benefits, including company-funded life insurance.

Life insurance for IT contractors

The IT contracting sector is one of the largest groups of professionals operating through personal service companies.

Typical contract roles include:

  • software developers
  • data engineers and analysts
  • DevOps and cloud specialists
  • cybersecurity consultants
  • IT project managers

Experienced IT contractors often work on high value projects with daily rates that can exceed several hundred pounds per day.

Because income is tied to contracts rather than permanent employment, many contractors seek ways to protect their families financially.

Where a contractor operates through a limited company, life insurance may be arranged through the company rather than personally.

This can make the cost of cover significantly lower than paying premiums from personal after tax income.

How IR35 affects contractors

IR35 is a set of tax rules designed to determine whether a contractor is effectively working as an employee for tax purposes.

Where a contractor is working outside IR35, they normally operate through their own limited company and invoice clients for services provided.

Where a contract is deemed to fall inside IR35, contractors are often paid through PAYE or an umbrella company.

Relevant life insurance generally applies only where the contractor operates through a limited company and is both a director and an employee of that company.

If a contractor works exclusively through an umbrella company, company-funded life insurance would normally not be available.

You can find out more about IR35 here.

How insurers assess contractor income

Contractors working through limited companies often receive income in several forms.

These may include:

  • director salary
  • dividends
  • retained company profits
  • contract income paid to the company

When assessing the maximum level of cover available, insurers normally consider the contractor’s overall remuneration.

This means both salary and dividends may be taken into account when determining the appropriate level of cover.

You can read more about this here: can salary and dividends be used as proof of income?

For experienced contractors with high day rates, insurers may allow relatively high multiples of income subject to underwriting.

Example scenario for an IT contractor

Consider an experienced IT contractor operating through a personal service company.

Income source Annual income
Contract income paid to company £140,000
Director salary £12,570
Dividends Remaining company profits

If the contractor purchases life insurance personally, the premiums must be paid from post tax income.

If the policy is arranged through the company instead, the premiums are paid directly by the business.

In many cases this means the overall cost of cover can be significantly lower.

You can see a detailed comparison here: relevant life vs personal life insurance

Tax treatment of company paid life insurance

Where the policy meets HMRC requirements, the premiums are usually treated as a business expense for the company.

This means they may be deducted when calculating corporation tax.

In addition:

  • the premiums are normally not treated as a benefit in kind
  • no employee or employer National Insurance usually applies
  • policy payouts are normally paid free of income tax

Because the policy is written into trust, the benefit is also normally outside the insured person’s estate for inheritance tax purposes.

You can read more about this here: relevant life insurance and inheritance tax

Further information on the HMRC rules can be found in the Employment Income Manual: HMRC guidance

When this approach may not be suitable

Although company funded life insurance works well for many contractors, it is not suitable in every situation.

For example it may not be appropriate where:

  • the contractor works through an umbrella company
  • there is no limited company structure
  • the contractor operates purely as a sole trader

In these situations a personal life insurance policy may be more appropriate.

Arranging life insurance as a contractor

Contractors with complex income structures should normally take professional advice before arranging life insurance through their company.

An adviser will typically review:

  • the company structure
  • income sources
  • the level of cover required
  • the trust arrangements for beneficiaries

This ensures the policy is structured correctly and complies with HMRC rules.

If you want to estimate the potential cost of cover you can use our calculator here: relevant life insurance calculator

You can also request a quote here: get a relevant life insurance quote