Most limited company directors pay for personal life insurance out of post-tax income. It covers the risk, but it’s not the most efficient way to fund it. There is a legitimate, HMRC-recognised alternative that allows your company to pay the premiums as an allowable business expense, with no income tax, no National Insurance, and no benefit-in-kind charge applied to you as the director. It is known as relevant life insurance.
At Rigby Financial, our Financial Advisers know everything there is to know about relevant life cover for directors, so this guide explains what it is, how it works, what the tax benefits are, and the conditions that must be met to ensure the policy qualifies.
What is relevant life insurance?
Relevant life insurance is a single-life, death-in-service plan set up and paid for by a limited company on behalf of an employee or director. If the insured person dies during the policy term, the policy pays a tax-free lump sum directly to their nominated beneficiaries via a discretionary trust.
It was introduced under the pension simplification legislation that came into force on April 6th 2006 (known as “A-Day”). This created a separate framework for employer-funded life cover outside of registered pension schemes. Ever since, major insurers have offered relevant life policies, and the product has become widely used by accountants and IFAs advising limited company directors.
How does relevant life insurance work for directors?
The limited company is the policyholder and pays the premiums directly from company funds, and the director is covered as an employee of that company. The policy must be written into a discretionary trust with the director’s chosen beneficiaries named.
This structure is important for two reasons because it means the payout doesn’t form part of the director’s estate at death, which has significant inheritance tax implications. Also, as the company does not own the benefit, HMRC doesn’t treat the arrangement as a company asset, which is a condition for the tax treatment to apply.
For directors, the policy must be structured as an employee benefit, not as protection for the business. If the main purpose is to protect shareholders, company loans, or the business’s capital value, a different structure applies.
Relevant life insurance covers the director as an individual.
Who qualifies as a director?
Salaried directors of a UK limited company qualify. Because relevant life insurance can only be taken out by a company as an employer, it’s not available to anyone trading as a sole trader or outside a limited company structure.
For controlling directors or spouse/part-time directors, HMRC applies additional scrutiny. Under the Business Income Manual, premiums must be proportionate to the work the director performs and must pass the “wholly and exclusively” test, which requires that the benefit form a legitimate part of the director’s remuneration. A part-time director on a modest salary taking out a very large policy, for example, could face an investigation from HMRC.
What are the tax benefits of relevant life insurance for directors?
The tax advantages are the main reason directors choose relevant life insurance over a personal policy.
Corporation Tax relief on premiums
Because the company pays the premiums, they’re treated as an allowable business expense in most cases. This reduces the company’s taxable profits, and Corporation Tax relief is available at between 19% and 25%, depending on annual profits.
No benefit-in-kind charge, no income tax, and no National Insurance
HMRC doesn’t treat relevant life insurance premiums as a P11D benefit-in-kind, provided the policy is set up correctly. Because of this, the director pays no income tax on the premiums, and neither employer nor employee National Insurance contributions apply.
This is the biggest saving for a higher-rate taxpayer. Paying for equivalent life cover via a salary requires the company to pay Corporation Tax on the profits used, then employer National Insurance on the salary. The director then pays income tax and employee National Insurance before the premium is paid. Relevant life insurance removes all of those steps.
Inheritance tax efficiency through the discretionary trust
Because the policy is written in a discretionary trust from the start, the payout doesn’t form part of the director’s estate on death. This means it is usually outside the scope of inheritance tax, so beneficiaries receive the sum directly and without delay.
The standard nil-rate band of inheritance tax threshold is currently £325,000. Directors with estates approaching or exceeding this will benefit most from the trust structure, since a personal life policy payout would add directly to the taxable estate.
No impact from the 2024 pension allowance changes
The pension Lifetime Allowance was abolished in April 2024 and replaced by two new limits: the Lump Sum Allowance (£268,275) and the Lump Sum and Death Benefit Allowance (£1,073,100). Relevant life policies are not counted against either of these limits.
Some questions were raised after the Lifetime Allowance was scrapped about whether relevant life insurance retained its advantages. For directors, the policy sits entirely outside the pension framework and is unaffected by the new lump sum limits.
Relevant life insurance vs personal life insurance for directors
The two covers are similar and almost identical in many ways. A relevant life policy pays the same death benefit to the same beneficiaries as a personal life policy taken out with the same insurer at the same premium. The difference is in how the premium is funded and how HMRC treats it.
Here are the key differences:
| Personal life insurance | Relevant life insurance | |
| Who pays the premium? | The director, from post-tax personal income | The limited company, from pre-tax profits |
| Corporation Tax relief? | No | Yes – premiums are an allowable business expense |
| Benefit-in-kind/P11D? | N/A | No – HMRC does not treat premiums as a benefit-in-kind |
| Income tax on premiums? | Paid before funding the premium via salary | No income tax is charged to the director |
| National Insurance? | Employer and employee NI apply to the salary used | Neither the employer nor the employee NI applies to premiums |
| Trust structure? | No – payout enters the estate | Yes – written in a discretionary trust; payout bypasses the estate |
| Inheritance tax exposure? | Payout forms part of the estate | Usually outside the estate for IHT purposes |
| Cover provided? | Death benefit to chosen beneficiaries | Death benefit to chosen beneficiaries – identical cover |
How to set up a relevant life insurance policy correctly
The tax treatment is not automatic, and there are conditions the policy must meet for HMRC to recognise it as an allowable business expense.
These requirements are:
- The limited company must be the policyholder and must pay the premiums directly.
- The policy must be written in a discretionary trust before cover begins.
- The benefit must be structured as an employee benefit, with the payout going to the director’s dependents.
- Premiums must meet HMRC’s “wholly and exclusively” test, which means they must form a genuine and proportionate part of the employee’s remuneration package.
- The policy shouldn’t be used to protect business assets, shareholder value, or company loans.
For more information on how relevant life insurance sits within a director’s planning, the key rules for relevant life policies and business protection planning guide on our website cover all you need to know.
Is relevant life insurance for directors the right choice for you?
Relevant life insurance is suited to:
- Directors of UK limited companies who pay for personal life insurance from post-tax income and want to fund equivalent cover.
- Higher-rate and additional-rate taxpayers.
- Directors whose companies don’t have access to group life insurance schemes.
- Directors with estates at or near the inheritance tax nil-rate band.
Get in touch with our expert team at Rigby Financial today to compare the cost of your current arrangement against a relevant life policy and see what works best for you.
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