Is relevant life insurance tax deductible for a limited company?

In most cases, relevant life insurance premiums can qualify for Corporation Tax relief.

This is one of the main attractions of taking out life cover via your company rather than paying for a personal policy from your own (post-tax) income.

There are other tax advantages too. A properly set up relevant life policy isn’t normally treated as a benefit in kind, which means your company doesn’t usually pay employer’s National Insurance on the premiums. And the employee (usually a director) doesn’t have to pay extra income tax on the size of the benefit.

In this guide, we look at how the tax treatment works and what you should check before taking out cover.

For a general introduction to relevant life plans, read our guide to relevant life insurance for limited company directors.

Can your company claim tax relief on relevant life insurance?

Relevant life insurance is an employer-provided benefit. Your limited company takes out the policy on the life of a director or employee and pays the premiums.

The premiums can normally be deducted when calculating the company’s taxable profits if they are paid wholly and exclusively for the purposes of the business.

This reduces the profits on which your company pays Corporation Tax.

For example, if your company pays £1,200 in qualifying relevant life premiums during the year, it can deduct that £1,200 when calculating its taxable profits.

The actual Corporation Tax saving depends on the rate your company pays.

For more information on how business expenses reduce your company’s taxable profits, read our guide to limited company expenses.

What does HMRC say about relevant life policies?

HMRC has specific guidance which covers relevant life policies.

A relevant life policy is a specific type of employer-provided life insurance that must meet certain conditions.

Among other things, a qualifying policy for an individual must provide a death benefit, have no surrender value and restrict who can ultimately benefit from it.

HMRC also clearly states that tax avoidance must not be a main purpose of the policy.

You can read the rules in HMRC’s guidance on relevant life policies.

Simply paying for an ordinary personal life insurance policy through your company doesn’t turn it into a relevant life policy.

The policy needs to be set up correctly from the outset.

How much Corporation Tax can you save?

The amount you can potentially save depends on your company’s Corporation Tax rate.

If the premium qualifies as a business expense, your company can deduct the cost from its profits before Corporation Tax is calculated.

Here’s a simple example:

This example assumes that your company receives full relief at 25%.

Your actual saving may be different. The Corporation Tax rate your company pays depends on its level of profits and whether the marginal relief rules apply. Many small companies pay an effective rate of 21 or 22% in reality.

For more information, read our guide to Corporation Tax for limited companies.

You can also use our relevant life insurance calculator to compare the potential cost with paying for life insurance personally.

Is relevant life insurance a benefit in kind?

A qualifying relevant life policy isn’t normally treated in the same way as benefits such as a company car or private medical insurance.

This means you don’t usually pay Income Tax on the premiums your company pays on your behalf.

Your company also doesn’t normally have an employer’s National Insurance liability on the premiums.

This is an important part of the tax saving.

If you bought personal life insurance instead, you would normally pay the premiums from income you had already taken out of the company and paid tax on.

With relevant life insurance, the company pays the insurer directly.

Why does the ‘wholly and exclusively’ rule matter?

For your company to claim a business expense, the cost generally needs to be incurred wholly and exclusively for the purposes of its trade.

Relevant life insurance is usually provided as part of an employee’s remuneration package.

This could include a director who works for their own limited company.

However, tax relief isn’t something you should simply assume applies to every policy in all circumstances.

What is important, as far as HMRC is concerned, is the purpose behind the expenditure. Does the expenditure benefit the business?

What happens to the payout?

Relevant life insurance is normally written into a discretionary trust.

If you die while the policy is in force, the insurer will pay the lump sum to the trustees rather than to your limited company.

The trustees then distribute the money to the beneficiaries in line with the trust.

The payout isn’t treated as company income and isn’t normally subject to Income Tax in the hands of your beneficiaries.

Using a trust can also help keep the payout outside your estate for Inheritance Tax purposes, provided the policy and trust have been set up correctly.

This is very different from key person insurance, where the business normally owns the policy for its own benefit and receives the payout itself.

Relevant life insurance vs paying personally

The tax difference becomes clearer when you compare the two ways of buying life cover.

If you take out personal life insurance, you pay the premiums yourself from your post-tax income.

If your company provides relevant life insurance, the company pays the premiums directly. It may receive Corporation Tax relief, while you don’t normally have an Income Tax charge on the benefit.

For a higher-rate taxpayer in particular, this can make relevant life cover considerably cheaper than funding the same premium personally.

Our main relevant life insurance guide includes an example comparing the post-tax cost of the two options.

Can any limited company claim the premiums?

Relevant life insurance is designed for employers providing life cover for an employee or director.

This means a sole director of their own limited company can potentially be covered.

It isn’t available to a sole trader in the same way because there is no separate employing company.

You also need to make sure the policy itself meets the relevant life rules.

Don’t buy an ordinary life policy personally and simply start paying the premiums from your business bank account.

If you want the company to provide the cover, arrange a policy specifically designed as relevant life insurance.

Check the policy is set up correctly

The potential tax advantages are valuable, but the policy must comply with the relevant life rules.

Before going ahead and setting up a new policy, make sure that:

• the limited company is taking out the policy (it is not a personal policy);
• the person covered is an employee or director of the company;
• the company pays the premiums from its own bank account;
• the policy meets the requirements of the relevant life legislation;
• the policy is placed into the appropriate trust; and
• your accountant is happy that the premiums qualify as a legitimate business expense

Unsurprisingly, we recommend you use the services of an experienced independent financial adviser who works with small company directors, and can compare quotes from all of the main relevant life insurers.

Find out more

If you would like to find out more about relevant life insurance and the potential tax savings for your company, our trusted partner, Broadbench, will be happy to help.

Broadbench specialises in providing advice for company directors and has set up life cover policies for hundreds of our visitors.

Simply fill in this form, and the team will get right back to you.