A relevant life policy can produce significant tax savings for Ltd company directors and business owners. The benefit comes from the way premiums are treated for corporation tax purposes. But how much does this actually save in real terms?
This article walks through a worked example using realistic figures so you can see the difference between a relevant life policy and a personal life insurance policy.
The Basic Setup
Let’s use a straightforward scenario:
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Director salary: £80,000 per year
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Monthly life insurance premium: £500
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Annual premium: £6,000
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Corporation tax rate: 25% (the current main rate for profits over £250,000)
We’ll compare two routes: paying for life insurance personally versus through the company via a relevant life policy.
Route 1: Personal Life Insurance (The Expensive Way)
If you pay the £500 monthly premium from your personal bank account, here’s what happens:
The £6,000 annual premium comes from your after-tax income. You’ve already paid income tax and National Insurance on your salary, so the money is yours to spend as you wish.
To find £6,000 from your salary of £80,000, you need to earn more than £6,000 because tax takes a slice first.
At the basic rate of income tax (20%) plus National Insurance (8%), the combined rate is roughly 28%. To have £6,000 left after tax, you need to earn approximately £8,333 gross.
So the real cost to you is around £8,333 in gross earnings to cover a £6,000 insurance premium.
Route 2: Relevant Life Policy (The Tax-Efficient Way)
Now let’s say your company pays the £500 monthly premium directly to the insurer. The premium is a business expense.
The £6,000 annual cost reduces the company’s taxable profit. At 25% corporation tax, this saves the company £1,500 in tax.
The company’s net cost is therefore £6,000 minus £1,500 = £4,500.
This saving belongs to the company. It either stays in the business or can be extracted as dividends (subject to dividend tax, but at a lower rate than income tax and National Insurance combined).
The Tax Saving Comparison
Here’s the difference in straightforward terms:
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Personal insurance: You need £8,333 gross earnings to pay a £6,000 premium
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Relevant life policy: The company pays £6,000 and saves £1,500 corporation tax, netting £4,500
The saving is £3,833 in gross earnings (£8,333 minus £4,500).
Put another way, the relevant life policy costs the company £4,500 net, whereas personal insurance costs you £8,333 in gross salary. That’s a saving of 46%.
What About Dividend Tax?
The corporation tax saving of £1,500 sits in the company. If you extract it as a dividend, you’ll pay dividend tax on it.
At the basic rate, dividend tax is 10.75% on dividends above the £500 dividend allowance. This reduces the £1,500 saving to about £1,339 net.
Even accounting for this, the relevant life policy remains far cheaper than personal insurance. The net cost to you is roughly £4,661 (£6,000 premium minus £1,339 dividend tax saving), compared to £8,333 for personal cover.
That’s still a saving of £3,672, or 44%.
What If Your Tax Rate Is Different?
The figures above assume the 25% corporation tax rate. If your profits are lower, you might pay 19% corporation tax instead.
At 19%, the tax saving on a £6,000 premium is £1,140. The company’s net cost becomes £4,860. Even with dividend tax, this is still significantly cheaper than personal insurance.
If you’re a higher-rate income tax payer (40%), personal insurance becomes even more expensive. You’d need to earn roughly £10,000 gross to pay a £6,000 premium after tax.
Important Conditions for Relevant Life Policies
The tax relief only applies if the policy meets HMRC’s definition of a relevant life policy. The key requirements and considerations are:
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Employer and Employee Relationship: Eligibility strictly depends on a genuine employer and employee relationship (including working directors).
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Trust Setup: The policy must be written in trust for the benefit of employees or their dependants.
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Premium Payment: The company must pay the premiums directly.
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Beneficiaries: The death benefit is paid to the trust, not directly to the company.
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No Cash Value: The policy cannot create a right to a cash surrender value for the employee.
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Tax Treatment: Corporation tax treatment is subject to local HMRC rules and is not guaranteed for all business circumstances. Tax rules and allowances may also change in the future.
If the policy is written incorrectly, HMRC may not allow the corporation tax relief. This is why professional advice matters.
Other Considerations
The tax saving is the main financial advantage, but there are other practical points:
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Suitability: Relevant life policies are not suitable for everyone, as individual financial objectives and business structures vary.
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Costs & Cover: Cover levels and premium costs vary depending on age, health, lifestyle, and individual policy terms.
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Personal Finances: A relevant life policy removes the insurance cost from your personal finances. The company handles the premium, and you don’t need to budget for it from your salary.
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Employment Changes: If you leave the company, the policy usually ends (subject to potential conversion options). This is different from a personal policy, which you keep regardless of employment status.
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Family Protection: The death benefit is typically paid to your family or dependants, not to the company. This means the money goes to the people who need it, rather than being locked in the business.
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Insolvency Protection: If the company becomes insolvent, the policy is protected because it’s held in trust. Creditors cannot claim the death benefit.
The Real-World Picture
Using our worked example, a £500 monthly premium costs you £8,333 in gross earnings if paid personally, but only around £4,661 net if the company pays via a relevant life policy.
Over ten years, that’s a saving of £36,720. Over twenty years, it’s £73,440.
These figures assume the tax rates and premium remain constant, which they won’t in reality. But they show why relevant life policies are so widely used by Ltd company directors.
What You Should Do Next
If you’re a Ltd company director without life insurance, or you’re currently paying personally, it’s worth exploring whether a relevant life policy makes sense for your situation.
The tax saving is real and substantial, but the policy must be set up correctly to qualify. This means working with a qualified financial adviser who understands HMRC rules and your personal circumstances.
A financial adviser can also help you determine how much cover you actually need, and whether a relevant life policy is the right solution for your business structure and family situation.
This article is for information only and does not constitute financial advice. For advice tailored to your circumstances, speak to a qualified financial adviser.
References
FreeAgent. (2026, April 6). UK dividend tax rates and thresholds for 2026/27. https://www.freeagent.com/rates/dividend-tax/
HM Revenue & Customs. (2023). Employment Income Manual: EIM15045: Excepted group life policies (relevant life policies). GOV.UK. https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim15045
HM Revenue & Customs. (2024). Business Income Manual: BIM45530: Specific deductions: key man insurance and relevant life policies. GOV.UK. https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45530
Royal London for Advisers. (2026, May 21). Relevant life plans technical guidance and HMRC rules. https://adviser.royallondon.com/technical-central/protection-guidance/relevant-life-plan/rlp-frequently-asked-questions/