By the time most limited company directors look at a Relevant Life policy, the question is not whether cover is needed, but whether it makes financial sense to arrange it through the business.
This is where tax treatment becomes the deciding factor. When set up correctly, relevant life policy tax relief can reduce the real cost of cover, avoid personal tax charges and keep premiums off your personal return. When this type of cover is structured poorly, those advantages disappear quickly.
This guide explains how the tax rules work in practice, what HMRC actually allows and where businesses tend to get caught out.
Who Can and Can’t Use This Type of Cover
This form of life insurance is designed for employees of a business. In practice, that includes most limited company directors, provided the setup follows the rules.
You can usually use a Relevant Life policy if:
- You are a director of a limited company
- You receive income via salary, dividends, or both
- The policy is written into an appropriate trust
- The business pays the premiums
You cannot normally use this arrangement if you are a sole trader or a partner in a standard partnership, because there is no separation between you and the business for tax purposes. Most providers will not cover equity partners or LLP members because they are not employees. Salaried partners who are genuine employees on PAYE may be eligible, but this is provider-specific and should always be checked before moving forward.
This distinction matters because the tax treatment relies on the policy being an employer-provided benefit for an employee, rather than a personal policy funded through the company.
How Corporation Tax Relief Is Applied
One of the main reasons directors choose this arrangement is corporation tax relief on the premiums.
In most cases, premiums paid by the company qualify as an allowable business expense. This means they are deducted from profits before corporation tax is calculated, reducing the overall tax bill.
HMRC’s key test is whether the cost is incurred wholly for the purposes of the trade. With this structure, that test is usually met because:
- The policy forms part of an employee pay package
- The benefit is linked to employment, not shareholding
- The business itself does not benefit from the payout
In practical terms, the company pays the premium, records it as an expense, and benefits from tax relief at the prevailing corporation tax rate.
Relief can be questioned when the setup blurs the line between business expense and personal benefit. Examples include policies that are not placed into trust or cover levels that are clearly out of step with pay. These situations are uncommon, but they do happen, most often due to rushed or generic setups.
Why This Setup Usually Stays Off Your P11D
A major advantage of Relevant Life policies is that they are normally not treated as a Benefit in Kind for the director or employee.
This matters because a Benefit in Kind would create:
- A personal tax charge
- Extra costs for the company
- Additional reporting through P11D or payroll
This outcome is avoided because the policy meets specific conditions set out by HMRC. The arrangement must:
- Only pay out on death or terminal illness
- Be written into a discretionary trust
- Prevent the employer from benefiting from the proceeds
- Pay benefits only on death before an age not exceeding 75, with no surrender value
When these conditions are met, the policy sits outside the usual benefits rules.
There is no personal tax charge and nothing to declare on a personal tax return. This treatment relies on the exemption under ITEPA s307 and the policy meeting the conditions for relevant life or excepted group life cover.
This is where the structure differs sharply from simply paying for personal life insurance through a company, which would usually result in a taxable benefit.
Common Tax Mistakes That Remove the Advantage
The tax efficiency of this type of business-funded cover is not automatic. It depends on the correct structure from the outset.
Some of the most common mistakes include:
Policies not written into trust
Trust is not just paperwork. It is central to keeping proceeds away from the employer and typically outside the director’s estate. Without it, the policy can fail the Benefit in Kind rules.
Using the wrong policy type
Not all business life policies follow the same tax rules. Group schemes and executive arrangements are treated differently.
Mismatch between pay and cover level
While there is no fixed cap, cover that is clearly excessive compared to salary can attract attention.
Assuming all advisers approach this the same way
Some focus on speed or cost rather than structure, which often leads to problems only being spotted later.
Most issues surface at claim stage or during an HMRC review, which is the worst time to correct them.
Example Scenarios
Consider two directors, both aged 45, each wanting £500,000 of life cover.
Scenario A: Policy structured correctly
The company pays the premium. The policy is written into trust. The cover level aligns with salary. The premiums are treated as an allowable expense, reducing corporation tax. There is no Benefit in Kind, no personal tax charge, and no impact on personal allowances.
Scenario B: Personal policy paid by the company
The company pays the premium on a standard personal life policy. While the cost may still be treated as part of the director’s pay, the director is likely to be taxed personally on the benefit. The company may also face extra costs and reporting.
The cover itself may look similar, but the overall cost to both the director and the business is often higher once tax is taken into account.
What to Check Before You Put It in Place
This type of business-funded life cover is not complicated, but it is precise. The tax benefits only work when every part of the setup aligns with HMRC expectations.
Before proceeding, it is worth checking:
- That the policy qualifies as Relevant Life
- That the trust is set up correctly from day one
- That the cover level reflects pay
- That premiums are recorded properly in the company accounts
This is where working with a specialist adviser like us can make a practical difference. We look beyond the policy itself, checking eligibility, structure and tax treatment before anything is put in place. That upfront review helps avoid common errors, reduces the risk of issues being picked up later and ensures the cover works as intended when it is needed.
For many directors, relevant life policy tax relief makes employer-funded life cover the cleanest option available. The key is not rushing the decision, but making sure it is structured properly before the first premium is paid.
