Relevant life insurance and taxation

Relevant life insurance lets your business provide life cover to your employees and company directors. It pays a lump sum to your employees' nominated beneficiaries when they die, providing death-in-service benefits in the same way as a group scheme. You can use a relevant life plan alongside a group policy or instead of it, depending on your circumstances. Always get professional advice from your accountant to ensure you follow the rules and invest in tax-efficient life cover.

Here's our guide to the tax rules and benefits of a relevant life plan.

Investing in a relevant life insurance policy has several tax benefits for your business and employees. Let's consider the business tax benefits first.

Corporation tax advantages

Relevant life insurance policy premiums are a tax-deductible business expense, meaning you can claim corporation tax relief on the cost of your premiums. Claiming tax relief therefore reduces your corporation tax payments and saves your business money.

Lower National Insurance payments

Changes in the law now mean that every UK employer pays increased National Insurance contributions. HMRC classifies some employee benefits, such as health insurance, as a benefit in kind, meaning your business must pay national insurance contributions on the premiums paid. However, this doesn't apply to death-in-service benefits, whether you use group or relevant life cover.

A relevant life plan can provide a lump-sum payment to employees' loved ones after they're gone and can have a positive impact on their tax affairs.

Reduced income tax and National Insurance contributions

As we've mentioned, HMRC doesn't treat a relevant life plan as a benefit in kind, so it doesn't attract additional income tax or employee National Insurance contributions. Your business pays the premiums, so there's no deduction from their salary, unlike pension contributions.

Employees may still decide to take out a personal life insurance policy. Still, they can save money as they'll receive lump sums from both policies, so they can pay for individual life insurance with a lower lump sum, thereby reducing their premiums. Personal life insurance policies are less tax-efficient because they are deducted from net salary, which has already been taxed.

Inheritance tax

A relevant life insurance payout goes into a discretionary trust, so it doesn't form part of an employee's estate and is exempt from inheritance tax. It can help with estate and tax planning, particularly when company directors or other high earners are at or near the nil rate threshold.

As the lump sum is paid straight into the trust, it also bypasses probate, so employees' loved ones receive the payment straight away rather than waiting for probate. That could be a real bonus for high earners who may have complex estates which take time to resolve.

The Government's Spring Budget Statement in March 2023 announced changes to pension and life insurance taxation that came into effect in April 2024, which could change how your business invests in life cover.

The old rules

Up until April 2024, the lifetime pension allowance limited the amount employees could receive from their pension and life cover tax-free. Pension and life insurance sums exceeding £1,073,100 were taxed at 55%. However, the rules only applied to group life cover, not to relevant life policies.

Companies frequently used relevant life plans to provide high earners with additional life insurance without increasing their income tax payments. Employees would also have to check how much of their allowance they'd used to help with tax planning.

Changes since April 2024

The lifetime pension allowance was abolished in April 2024, meaning you can provide your employees with life cover using group or relevant life policies without attracting additional tax.

The changes could mean a relevant life plan isn't worth having, since it doesn't offer any tax advantages over a group policy. However, it's always wise to speak with your tax adviser or accountant and encourage your employees to do the same to ensure you're taking the most tax-efficient approach.

Do you still want to invest in a relevant life insurance policy?

Relevant life insurance had some remaining tax benefits, particularly if an employee's pension pot exceeded the lifetime allowance before April 2023 or if they retired before April 2024.

Most life insurance providers offer group life cover only to businesses with at least five employees. If your company has fewer than that, you can still choose a relevant life plan to give your team the same benefits. You'll also have more options, allowing you to choose the insurer and policy that best meet your needs and budget. Speaking with an independent insurance broker will help you make an informed choice.

Under the old tax rules, strict criteria ensured that companies couldn't use relevant life insurance policies to avoid tax or purely for business protection. While the tax rules have changed, the same criteria remain. If you want your premiums to be tax-deductible, they must follow these rules.

Relevant life insurance must only provide life cover

Some life insurance policies also provide other types of coverage. For example, you can combine life coverage with critical illness insurance that pays a lump sum if an employee is diagnosed with a serious illness. Taking this approach could have some cost benefits, but it won't count as a relevant life policy.

Age limits

Your business can only provide relevant life cover to people of legal working age, meaning you can only buy a policy for employees aged 75 and under.

No surrender value

A relevant life plan covers one employee. If they leave, you can transfer the policy to them or their new employer. However, the policy can't have a cash surrender value. The lump sum is payable only on death or following a terminal diagnosis, if the terms and conditions allow it.

Where the lump sum is paid

A relevant life insurance policy payout can only go to an individual, a charity or a trust. As we've mentioned, policies typically use a discretionary trust, which also offers inheritance tax advantages.

This rule prevents a business from using relevant life cover to benefit itself rather than its employees. For example, two company directors and equal shareholders could nominate each other as beneficiaries. This could be because they're married or otherwise related. However, if one shareholder died and the other used the funds to retain control of their shares, this could constitute tax avoidance. The tax rules can be complex, so always seek professional advice.

At Globacare, we help our clients find the right life insurance coverage for their business. Contact our team of life insurance brokers for a comparison quote tailored to your needs.