Relevant Life Plan

Tax Deductible Life Insurance for Employees and Directors

Relevant Life Plans offer an exceptionally tax-efficient life insurance solution that businesses can extend to their employees, including company directors. This is a single-life, death-in-service benefit that is held in trust and provided by the business, offering protection similar to a standard life insurance policy. However, the tax advantages of this product are considerable.

For businesses, the monthly premiums can be eligible for up to 25% in corporate tax relief and do not incur any employer National Insurance contributions. Additionally, employees do not face a benefit-in-kind charge (P11D), allowing them to avoid paying income tax at their highest rate. Company directors, in particular, can achieve substantial savings—often as much as 50%—by having their life insurance covered through this plan by the business.

Depending on the tax rates applicable to an individual and their company, and even after maximizing tax efficiency through dividends, some individuals may see savings of up to 66% compared to financing life insurance from their post-tax earnings.

For other companies, these premiums are generally considered an allowable business expense, with no associated National Insurance contributions or benefit-in-kind charges for either the company or the employee.

Relevant Life Plans were introduced in 2006 following the pension simplification reforms, providing a tax-efficient means for business owners to offer life cover to their employees and directors. These plans are particularly valuable for employers who are unable to offer group scheme coverage, as they serve as an excellent tool for attracting and retaining top talent. For company directors, the generous coverage available makes this a particularly attractive option.

How Does it Work?

The business or employer arranges the plan on behalf of an employee or director. This plan can be extended up to a maximum age of 75 and includes flexible continuation options in the event that the employee or director leaves the company.

Generous coverage amounts are available, depending on specific criteria, and the plan is established from the outset within a designated discretionary trust, known as a Relevant Life Plan Trust.

This arrangement ensures that the benefits do not become part of the deceased’s estate, allowing for faster access to funds and ensuring that the proceeds are paid out tax-free.

Relevant Life Plan vs Personal Life Policy

James is a 45-year-old managing director and business owner, and he’s evaluating whether to obtain life insurance through his company or to purchase it personally.

He has received quotes for both a personal life insurance policy and a business-funded life insurance policy. Both policies offer £1 million in coverage to ensure his family is protected and are set to expire when he reaches age 75.

The premiums for each of these policies are identical, as is typically the case with most providers. So, which option should James choose? At first glance, both seem to offer the same coverage for the same premium. And that’s true—on the surface, they appear identical.

However, business-funded life insurance policies are not inherently cheaper than personal coverage. The real savings come from selecting a policy that qualifies for favorable tax treatment.

The following tables illustrate the difference in tax implications between a personal life insurance policy and a qualifying business-funded life policy. James can either pay for his policy out of his post-tax income or opt to have his company provide the essential coverage he needs. In this example, the corporate tax rate is 20%.

Tax Efficient

In this scenario, James is a higher-rate taxpayer. However, if James were a basic-rate taxpayer, the savings could still reach up to 40%, based on the current tax legislation for the 2023/24 tax year.

The way you structure your life insurance can lead to substantial differences in cost. If you’re curious about how much you could save, feel free to contact us using the form below.

Let's take a closer look

Relevant Life Plan FAQs

If you're a Director paying for life insurance from your personal income, now's the time to switch to the Relevant Life Plan:

• Premiums paid by the company are considered a tax-deductible business expense.

• The premiums are not regarded as a benefit in kind and are not taxable for the insured individual.

• These premiums do not affect the employee’s annual pension allowance.

• No employer or employee National Insurance contributions are applied to the premiums.

• Any benefits paid out are exempt from income tax.

• The death benefit is excluded from your estate for inheritance tax (IHT) purposes.

• Typically, the maximum amount of cover available is £10 million.

Important Information

• Policies must be established within an appropriate discretionary trust.

• The individual covered must be a UK resident and an employee of a UK-based business.

• There must be a clear employer-employee relationship in place.

• Although the policy is arranged and funded by the employer, it is owned and controlled by the trustees. Typically, the trustees are the business owner(s), meaning the employer.

• A controlling director is considered both an employee and an employer.

Setting Up Cover

Many employers opt to determine the coverage amount as either a fixed sum or a multiple of the employee’s salary. Depending on the insured’s age, most providers allow a maximum income multiple of 25 to 30 times. For further details and to find out how much benefit and tax savings you may be eligible for, please contact us.