Tax benefits of relevant life insurance
Relevant life insurance is one of the most tax-efficient ways for a limited company to provide life cover for a director or employee.
A correctly structured relevant life policy allows a company to provide life insurance while benefiting from several important tax advantages.
These normally include corporation tax relief on premiums, no benefit-in-kind charge, and a tax-free payout to beneficiaries through a discretionary trust.
When the policy is set up correctly, the company pays the premiums, may receive corporation tax relief, and any eventual payout is passed to the employee’s chosen beneficiaries free from income and inheritance tax.
HMRC recognises relevant life policies as a legitimate form of employee benefit provided they meet certain qualifying conditions.
The policy must be taken out by the company, cover an employee or director, and be written into a discretionary trust. These conditions are explained in HMRC’s Business Income Manual (BIM45525).
For a broader overview of how these policies work, see what is relevant life insurance?.
Corporation tax relief
Premiums for a qualifying policy are normally deductible against Corporation Tax, provided they are incurred “wholly and exclusively for the purposes of the trade”.
This requirement is set out in section 54 of the Corporation Tax Act 2009.
In practice, this means the policy must be taken out to provide a genuine employee benefit rather than acting as a personal perk for a shareholder or participator.
The company pays the premiums from its business account and records them as an allowable expense when calculating taxable profits.
Your accountant should confirm that the policy meets the test for your particular company structure and ownership pattern.
See also whether relevant life insurance counts as a business expense.
No benefit-in-kind charge
A properly structured relevant life policy is not normally treated as a taxable benefit for the insured director or employee.
The company pays the premiums but the individual does not usually pay additional Income Tax or National Insurance on the value of the cover.
Premiums are typically not reported on a P11D form and no employer National Insurance contributions are due.
This treatment makes relevant life cover significantly more tax-efficient than paying for a personal life policy from post-tax income.
See relevant life vs personal life insurance for a comparison.
Outside pension contribution limits
Relevant life insurance premiums do not count towards the individual’s pension annual allowance.
This separation from pension contributions can be particularly attractive for company directors who already maximise their pension savings each year.
Unlike group life schemes provided through pension arrangements, relevant life policies sit outside the pension framework while still delivering death-in-service style protection.
This allows companies to provide substantial life cover without affecting pension planning.
Tax-free payout through a trust
When the insured person dies during the policy term, the insurer pays the benefit to the trustees of the discretionary trust.
The trustees then distribute the funds to the nominated beneficiaries.
Because the payout passes through the trust rather than the estate, the benefit is normally free from both Income Tax and Inheritance Tax.
This structure also allows the funds to be distributed quickly without waiting for probate.
For more detail see how trusts work with relevant life policies and our guide to inheritance tax and relevant life insurance.
When tax relief may not apply
Corporation tax relief may be denied if HMRC considers the policy primarily benefits the business owner in a personal capacity rather than serving a genuine business purpose.
For example, relief may be challenged if the policy is structured mainly to extract company profits tax-efficiently or if the insured person is not genuinely an employee or director.
In these cases the premiums could potentially be treated as distributions rather than deductible expenses.
Professional advice helps ensure the policy is structured correctly from the outset.
Our partner Broadbench specialises in arranging compliant relevant life policies for limited company directors and can ensure the documentation and trust structure meet HMRC requirements.
To explore the structure further, see what a relevant life policy is, how trusts operate, and whether premiums qualify as a business expense.