If you are a director of your own limited company and you are paying for life cover out of your own pocket, you are almost certainly paying more than you need to. Relevant life cover lets the company pay instead — and the tax treatment is considerably better.
This is a guide to how it works, who it suits, and where it does not.
What relevant life cover is
A relevant life policy is a death-in-service benefit for a single employee, taken out and paid for by the company. If the person covered dies while employed, it pays a lump sum to their family, normally through a discretionary trust.
Group death-in-service schemes do the same thing for a whole workforce, but they generally need a minimum number of employees. Relevant life cover does it for one person — which is what makes it work for small companies and for directors.
Why the tax treatment is the point
Compare the two ways of buying the same cover.
Paying personally. You draw the money out of the company as salary or dividends, pay income tax and possibly National Insurance on it, then pay the premium out of what is left.
Through a relevant life policy. The company pays the premium directly. Normally:
- The premium is treated as an allowable business expense, so it reduces the company’s corporation tax bill
- It is not a P11D benefit, so there is no income tax or National Insurance for the director personally
- The payout is normally free of income tax, and written in trust it normally sits outside the estate for inheritance tax
The saving is not marginal. For a higher-rate taxpayer the same cover can cost the household substantially less once the money never has to be drawn out at all.
Want to know what it would cost you?
We will compare what you are paying personally against what the same cover costs through the company. Free, with no obligation.
Book a free consultationHow it interacts with your pension allowances
This is worth being precise about, because a lot of older material online is now out of date.
The lifetime allowance was abolished on 6 April 2024. It was replaced by two allowances that govern tax-free lump sums: the lump sum allowance of £268,275, and the lump sum and death benefit allowance of £1,073,100.
The point that used to be made about the lifetime allowance still holds, it just has a different name now. A relevant life policy is not a registered pension scheme, so a payout from it does not normally use up those allowances the way a death benefit from a pension would. For a director with a substantial pension pot, that can matter a great deal to the family.
Who it suits
- Directors of small limited companies — particularly anyone currently paying for personal life cover out of drawn income
- Companies too small for a group scheme that still want to offer death-in-service cover
- High earners, where the difference between paying personally and paying through the company is largest
- Businesses trying to keep key staff, as a benefit that costs the company relatively little to provide
Where it does not work
Being straight about the limits is more useful than a list of advantages.
- It must be genuine employment. The person covered has to be an employee or a director of the company. Sole traders and equity partners cannot use it for themselves.
- It is life cover, not a savings plan. No investment element, no surrender value. If you stop paying, it stops.
- The premium has to be justifiable. Corporation tax relief depends on the company’s local inspector accepting the cost as wholly and exclusively for the purposes of the trade — which in practice means it needs to be reasonable relative to the person’s remuneration and their value to the business. It is not automatic.
- It does not cover critical illness in most forms, and it does not replace shareholder protection or key person cover. Those are different jobs.
Relevant life, key person, shareholder protection
These get confused constantly, so, briefly:
- Relevant life pays the employee’s family. It is a benefit for them.
- Key person cover pays the company, to survive the loss of somebody the business depends on.
- Shareholder protection gives the surviving shareholders the money to buy the deceased’s shares from their estate, so the family gets paid and the business keeps control.
Most director-owned companies eventually need more than one of the three. They are best looked at together rather than one at a time.
What to do next
If you are a director paying for life cover personally, the comparison is quick to run and the answer is usually clear. If you have staff you are trying to keep, it is worth looking at alongside the pension arrangement rather than separately.
We are an independent, whole-of-market firm based at Glasgow Harbour, working with company directors across Glasgow and the west of Scotland.
This article is for information only. It is not financial advice or a personal recommendation, and it does not take account of your circumstances. Any recommendation would follow a full assessment.
Tax treatment depends on individual circumstances and may change in future. Corporation tax relief on premiums is not guaranteed and depends on the cost meeting HMRC’s “wholly and exclusively” requirement. The inheritance tax treatment of a payout depends on the policy being written under an appropriate trust. Relevant life policies have no cash-in value at any time and cover ceases if premiums stop.