A Guide to How HMRC Tax Relevant Life Insurance

Offering relevant life cover can help attract high-calibre employees and the tax benefits can make it a cost-effective option too.

Read on for all the ins and outs of how relevant life insurance policies are treated by HMRC and how your business could profit by offering it as a competitive benefit to attract great employees to your team.

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What is the tax treatment on relevant life insurance policies?

Relevant life insurance is owned by the company. The premiums are paid by the company and can be offset against corporation tax, as long as the policy is exclusively “for the purpose of trade”, forming part of the employee’s remuneration and not a business asset. No National Insurance is paid on relevant life premiums, saving businesses more money.

Relevant life insurance can be taken out for employees and directors, but the company must agree to pay the premiums and conditions have to meet HMRC requirements. To receive the favourable tax treatment…

  • The policy must be purely for protection; it can have no surrender value or investment element
  • The person assured must be an employee of the company and not only a shareholder
  • Employees would include directors and salaried partners on PAYE
  • Sole traders or self-employed contractors to the firm would not qualify for the same tax relief

Is relevant life cover tax deductible?

Since relevant life insurance is owned and paid for by the business, policy premiums are treated as a tax deductible business expense. National Insurance doesn’t apply either, which is another way a business can save significant money on providing cover for employees.

Relevant life cover isn’t treated as a benefit in kind either so company directors can win again, since a personal life insurance policy would have to be paid for using taxed income.

Can I get tax relief on premiums?

Yes, premiums are paid for by the business and get tax relief since they are treated as a business expense by HMRC.

What about corporation tax?

Yes, premium costs can be offset against corporation tax. HMRC treat premiums paid on relevant life insurance policies as an allowable business expense, so long as you follow HMRC rules about who is insured and make sure there is no investment element or surrender value on the policy you take out.

What are the tax benefits for employees?

Premiums on relevant life insurance are tax deductible for the business and therefore not treated as a benefit-in-kind to the employee, which often come with a significant tax bill.

Employees also benefit by not having to pay for premiums on a personal life insurance policy from their taxed income.

The biggest benefit for the employee is the tax-free payout, should a claim be made during the term of the relevant life cover. This means that their family will receive more of the money if a claim is made.

Is relevant life cover a benefit in kind?

The premiums for relevant life cover are tax deductible for employers and not classed as a P11D benefit-in-kind by HMRC for employees.

Employees insured by relevant life cover won’t pay income tax on the premiums. Both the employee and employer also avoid having to pay National Insurance Contributions on the premiums.

Because employees don’t have to pay the premiums from their taxed income, this can mean big savings when an employee doesn’t have to fork out for premiums on a personal life insurance policy.

What is the taxation treatment on a lump sum payout?

If a claim is made against a relevant life insurance policy, the lump sum payout will be made free from income tax, National Insurance and Capital Gains Tax.

Further tax relief can be made by writing a relevant life policy in trust. By doing this the policy won’t fall into the lifetime pension allowance and will avoid Inheritance Tax (IHT) and getting mixed up in the estate and time-consuming probate administration.

The tax-free proceeds from a relevant life policy can be used towards any IHT owing on your estate, which is applied at 40% on any amount above £325,000.

Speak to an expert

If you want to set up relevant life insurance for yourself or other employees of your company, get in touch and let the expert independent financial advisors help you find the right policy at the best available price.

They will be happy to explain all the applicable tax rules and help ensure the policy is set up right from the start by writing it into trust, protecting your family from any potential inheritance tax charges in the event of a claim.

Make an online enquiry or call 0808 189 0463 for a free, no-obligation chat and we’ll match you with one of the experts we work with.

All the experts we work with are independent financial advisors authorised and regulated by the Financial Conduct Authority and fully qualified to provide advice.

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