SE11841 - Enhancing an asset: example - premium paid to an existing life assurance policy

Section 203FA ICTA1988

Example

From the early 1990s onwards, a common non-cash remuneration scheme involved an employer paying a premium to a life assurance policy already owned by an employee (see SE11840). The most common scheme worked as follows:

• 24 July 1998 - the two directors of a close company each apply to a well known life assurance provider to open personal policies and each invests the minimum £1,000 required to commence their policy
• 29 July - the company awards each director a bonus in the form of a premium to be paid to any existing life policies in their name
• 4 August - the employer pays £202,000 to the life assurance provider, to cover a £100,000 premium to be paid into each director's policy, plus commission
• 6 August - both directors inform the life assurance provider that they wish to cancel their policies
• each director receives £101,000 from the life assurance company.

Is the employer obliged to operate PAYE on the premium?

• Yes. The additional premium paid by the employer to each policy has enhanced the value of an asset already owned by the directors. Under Section 203FA ICTA1988 each life assurance policy, with its value enhanced by the amount of the premium, is a readily convertible asset, and the employer must operate PAYE on the value of the enhancement - £100,000 in each case.

Was PAYE due on a similar award before 6 April 1998?

Section 203FA came into effect on 6 April 1998. Before that date awards of this type were subject to PAYE if the premium was paid in satisfaction of a pre-existing monetary entitlement. This argument depends on the exact facts of the bonus award and particularly on the wording of the resolution awarding the bonus (see SE12002).

Section 203F(2), before it was amended by Finance Act 1998, could also apply to life assurance premium payments if the employer provided a tradeable asset when contributing a premium to a policy. Again this depended on the facts.

Implications of NICs decision in Tullett & Tokyo case

In 2000 the High Court held that NICs were not due on schemes involving premia paid by a life assurance provider to a life policy owned by employees of Tullett & Tokyo Ltd (see SE12101). This NICs decision does not affect the employer's obligation to operate PAYE where the premium was paid in satisfaction of a pre-existing monetary entitlement (see SE12002).

For further guidance on this point contact Employment Income Technical.