Tax Benefits of a Relevant Life Policy

The reason relevant life policies exist is tax efficiency. The cover itself is ordinary life insurance, the difference is who pays for it and with what money.

The three main tax advantages

• Corporation tax relief. Premiums paid by the company are normally an allowable business expense, reducing the corporation tax bill.
• No benefit in kind. Premiums are not treated as a P11D benefit, so you pay no income tax on them.
• No National Insurance. Neither employee nor employer NI applies to the premiums.

Why paying personally costs more

To pay a £100 premium from your own pocket, your company must first pay you enough salary to be left with £100 after income tax and National Insurance. For a higher-rate taxpayer that means paying out substantially more than £100, plus employer NI on top. Through a relevant life policy the company simply pays £100, and usually deducts it from taxable profits.

The payout is tax-efficient too

The lump sum is paid through a discretionary trust: normally free of income tax, and usually outside your estate for inheritance tax purposes.

Use the tax savings calculator to see the difference for your own numbers.

This page is for information only and does not constitute financial advice or tax advice. Tax treatment depends on individual circumstances and may change. Speak to a qualified financial adviser.

How relevant life policy tax treatment compares to other routes

Directors usually have three ways to fund personal life cover: pay for it out of taxed income, take extra dividends to cover the premium, or use a relevant life policy. HMRC’s “wholly and exclusively” test is what determines whether a company can claim corporation tax relief on the premium, in practice, insurers and advisers structure relevant life policies specifically to meet this test, which is why relief is normally available where a standard personal policy or a company-paid personal policy would not qualify in the same way.

What affects the actual saving

The size of the saving depends on your income tax band, whether cover would otherwise have been funded through salary or dividends, and your company’s corporation tax position. These vary by individual circumstances and by tax year, which is why a generic percentage figure won’t reflect your own numbers, the calculator is built to use your specific inputs rather than a headline average.

Common questions from accountants and directors

Accountants often ask whether a relevant life policy affects a company’s annual investment allowance or R&D claims, it doesn’t, because the premium is treated as a normal deductible business expense rather than capital expenditure. Directors sometimes ask whether the policy needs renewing or re-underwriting each year: it doesn’t, provided premiums continue to be paid, though cover levels are usually reviewed periodically as income and circumstances change.

Is life insurance a benefit in kind for a director?

An ordinary personal life insurance policy paid for by the company normally is a benefit in kind, reportable on the P11D and subject to income tax on the director and Class 1A National Insurance on the employer. A relevant life policy normally is not, because it is written under the specific HMRC conditions for a relevant life plan, single life, death (and optionally terminal illness) benefit only, no surrender value, and held in a discretionary trust for the individual’s family or dependants. That exemption is what makes the two routes behave so differently for the same amount of cover. Meeting the conditions is what matters; if the plan drifts outside them, the benefit-in-kind exemption is what you lose first.

Is life insurance tax deductible for a limited company?

Premiums on a correctly constituted relevant life policy are usually an allowable deduction for corporation tax, because they form part of the remuneration package of a genuine employee or director and so meet the wholly-and-exclusively test. Deductibility is not automatic. HMRC can disallow the expense where the cover looks disproportionate to the person’s actual role in the business, where the individual is a shareholder rather than a working employee, or where the arrangement plainly exists to extract value rather than to provide employee benefit. In practice this rarely bites on a working director paid a normal salary, but it is the reason a token-salaried spouse with a very large sum assured attracts questions.

What HMRC actually looks at

Three things decide the treatment: whether there is a genuine employment relationship, whether the policy terms match the relevant life conditions, and whether the trust was properly executed at outset rather than added later. Documentation is the weak point in most cases, the trust deed, the letter of wishes, and evidence that the company (not the individual) is the applicant and premium payer. Keep those three together with the company records and the position is straightforward to evidence if it is ever queried.

How the treatment differs from key person cover

Directors sometimes conflate the two. Key person insurance protects the company against the financial loss of losing a key individual, so the company is the beneficiary and any payout is normally a trading receipt taxed in the company. A relevant life policy protects the individual’s family, with the payout going to the trust rather than the business. The premiums are treated differently, the beneficiary is different, and the two are not substitutes, a company can hold both for the same person for different purposes.

The three tax layers, separated

It helps to keep the tax effects apart rather than treating them as one saving. First, the premium is a company expense, so it is normally deductible against corporation tax under the wholly-and-exclusively test. Second, because the policy is not a P11D benefit when correctly structured, there is no income tax charge on the director and no employer or employee National Insurance on the premium. Third, the payout is held in trust, so it is normally free of income tax in the beneficiaries’ hands and usually sits outside the estate for inheritance tax. Three separate reliefs, each with its own conditions, losing one does not necessarily lose the others.

Where the treatment can fail

The reliefs depend on the structure holding up. The most common faults are the policy being taken out in the individual’s name rather than the company’s, the trust never being executed, or the beneficiary wording being drafted so the benefit could return to the company, which turns it into a business asset rather than a family benefit. A critical illness element bolted on to the same contract can also change how HMRC views the arrangement. None of these are exotic problems; they are paperwork faults that only surface at claim, when they are no longer fixable.

Trust periodic charges

Discretionary trusts sit inside the relevant property regime, which brings potential ten-year anniversary and exit charges. In practice a term policy with no surrender value has a negligible value between claims, so the charges are usually not an issue while the policy is simply running. The point at which it can matter is when a claim is paid and the money is held in trust rather than distributed promptly. This is a question for the trustees at the time, and one worth raising with an adviser rather than discovering later.

What to check with your accountant

Three things are worth confirming in writing: that the premium is being coded as a deductible expense rather than a benefit, that the trust deed is executed and stored somewhere the trustees can find it, and that the cover multiple used is supportable against your actual remuneration from that company. Tax treatment depends on individual circumstances and can change.

Is life insurance eligible for tax relief through a limited company?

Yes, but only when it is set up correctly as a relevant life policy, ordinary personal life insurance paid for by a company does not qualify for the same tax treatment. If a director simply asks their company to pay their existing personal life insurance premiums, HMRC treats that payment as a taxable benefit in kind, and it is unlikely to be an allowable business expense.

The relief only applies when three conditions are met together: the policy is written specifically as a relevant life policy (not a standard personal or group life policy), it is placed into a discretionary trust from the outset, and the premiums meet HMRC’s “wholly and exclusively for the purposes of the trade” test. Where all three apply, premiums are typically treated as an allowable business expense for Corporation Tax purposes, and no P11D benefit-in-kind charge arises for the director or employee covered.

What HMRC actually looks at

HMRC does not pre-approve individual policies for tax relief. Instead, relief is determined at the point premiums are claimed as a deduction, based on whether the arrangement genuinely meets the relevant life policy rules set out in its guidance (see HMRC EIM15045). This is why the trust document, the named beneficiary, and the policy wording all matter, a policy that is functionally identical to a relevant life policy but missing the trust step does not receive the same tax treatment.

Related guides

• Who Qualifies for a Relevant Life Policy?
• What Is a Relevant Life Policy?
• Relevant Life Policy Calculator
• How to Set Up a Relevant Life Policy
• Relevant Life Policy for Limited Company Directors
• Relevant Life Policy for IT Contractors and PSC Owners
• What Happens to a Relevant Life Policy When the Company Is Wound Up?
• Is a Relevant Life Policy the Same as Relevant Life Assurance?

For a detailed breakdown of Corporation Tax and National Insurance savings, read our in-depth guide on the tax benefits of a relevant life policy explained.