Joe Hawes, Chartered Financial Planner at CBW, examines key business protection measures in ‘The Dentist’.
Like most business owners, principal dentists are familiar with the key business protection measures. For instance, if a significant member of the practice were to die or were unable to work due to serious illness, key person life assurance or critical illness cover would typically kick in to provide a lump sum to replace lost revenue and to help find a replacement.
Similarly, arrangements can be put in place to help the surviving business owners or partners to buy the deceased’s shares should one of the owners pass away. An arrangement of this kind helps to ensure practice continuity as well as patient care. It would also help to avoid difficult conversations with the deceased’s estate, which is important if the inheritors are not part of the profession and are unwilling or unable to become involved.
Life assurance and critical illness cover, when set up correctly, can be cost effective and potentially tax efficient ways to plan for specific business risks. However, alongside these necessary business precautions, other options should also be considered.
Cover for non-clinical staff
Losing a fee-earning dentist will undoubtedly hurt the practice, but other members of staff, both clinical and administrative, should also be identified where their loss could prevent the business from trading. Practitioners should ask themselves who will take charge if something happens to the practice manager. A worst-case scenario could see clinical staff managing appointment bookings, record keeping, HR and staffing issues, or other tasks required to run a successful business. They may not be appropriately trained to do so, which could compound an already difficult and sensitive situation. It’s a simple fact that practice management and administration are professional skills and should be viewed as such when considering the people who are most important to the smooth-running of the practice.
Group income protection
This type of scheme provides the business with up to 75 per cent of the salary of an employee who is unable to work for an extended period due to serious ill health. Another benefit is that it allows the employer to offer sick pay benefits to staff. However, this is less important where members of staff are NHS employees as sick pay benefits are provided to them.
Should serious illness arise, the practice will receive the tax-free proceeds of a claim but must deduct income tax and national insurance under PAYE as normal from the employee’s salary. Group income insurance can also cover employer’s pension and national insurance contributions.
New employees automatically become part of the scheme, and leavers are automatically withdrawn. The arrangement can be used to replicate the benefits provided within the NHS, with different levels of cover for different groups of employees or increased cover after a certain number of years’ service, for instance.
There is no individual underwriting, therefore, unless someone has a level of income which is above the scheme’s limits, it’s relatively simple to administer. That said, the highest earners could benefit from an individual policy if they cannot be part of the group scheme. These enhanced benefits can be used to attract or retain high quality staff.
Group death in service
This is essentially a group life assurance policy. Similar to sick pay, it’s provided to members of the NHS Pension Scheme, and in private practice it can be a relatively inexpensive benefit which is highly valued by employees. A scheme can be set up paying a multiple of an employee’s salary to their family if they die whilst in employment.
Like sick pay or income protection, different groups of employees can be given different levels of cover, joiners and leavers automatically enter or exit the scheme, and, except for those with the highest salaries, all members of staff are immediately accepted into the scheme without underwriting. If certain conditions are met, the death in service scheme can even be part of an employer’s pension provision.
Where employees are unable to join the group scheme, a relevant life policy should be considered.
Relevant life cover
This is a standard life assurance policy, which is individually underwritten on the life of an employee, set up under a specific trust, and paid for by an employer. Premiums are typically an allowable business expense and not a benefit in kind, therefore, it’s not taxable on the employee. In addition, the cover doesn’t need to be included in the calculation of an individual’s annual allowance or lifetime allowance usage for their pensions.
It’s particularly useful for individuals who can’t be part of a group life scheme, perhaps because their earnings are outside the scheme’s limits or they can’t be part of a pension-based scheme, for instance, because they hold certain lifetime allowance protection certificates.
The employer is usually a trustee and the maximum amount of cover is a multiple of remuneration (salary and dividends). Limits vary depending on the age of an individual life assured. When an employee leaves service many insurance companies will allow the existing cover to continue, with premiums paid by the individual.
Put simply, the various forms of business protection should be reviewed regularly, and practices should look beyond simply providing for the business owners and prominent clinical staff. Some options can be used as part of the benefits package for employees, and arrangements set up in the correct way can be relatively inexpensive and be offset against tax in many instances.
Arrangements that have been in place for a number of years should also be reviewed and updated if necessary, especially if the practice has changed significantly in size or turnover, and if the mix of different types of staff has altered. In fact, practitioners should review the cost of cover in the same way they would review the costs to insure their premises or business equipment.
This article was written for and first published in the November 2018 edition of ‘The Dentist’.
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