Tax-efficient life insurance through a limited company

Many limited company directors can achieve substantial tax savings by setting up relevant life insurance rather than personal life insurance. Relevant life cover is a death-in-service benefit arranged and funded by an employer, making it a tax-deductible expense for the business and a tax-free benefit for the individual.

This post provides a brief overview of relevant life insurance for limited company directors and small employers, including the potential tax advantages and eligibility requirements.

Relevant life insurance for limited company directors

Relevant life insurance is a tax-efficient way for businesses to provide life cover to their employees (including directors and salaried partners) on an individual life basis. As a death-in-service benefit, it pays out a lump sum to an employee’s family or dependents if the employee passes away or is diagnosed with a terminal illness during the policy term.

Relevant life plans are primarily designed for businesses that are too small to set up group life insurance, so they are ideal for companies with only one or two directors or fewer than five employees. However, these policies are also useful for larger employers wanting to top up existing group life policies or offer an alternative option to high-earning employees. 

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The business sets up the policy to cover the life of an individual employee, paying the premiums from its business bank account. So, although the plan covers a single person, the business is the policyholder. This differs from a personal life policy, where the individual arranges life insurance on their own behalf and pays the premiums from personal income after tax.

Tax benefits of relevant life insurance 

Arranging relevant life insurance through your limited company can result in more favourable tax treatment for you and your business than purchasing personal life cover yourself. 

If you have employees, providing relevant life insurance as part of an overall benefits package can also be a tax-efficient way to attract, reward, and retain key talent. While group life schemes are available for this purpose, they aren’t suitable for every business.

Here are six potential tax benefits of arranging relevant life insurance through your limited company: 

1. Reduce your Corporation Tax bill

Since the company will own and pay for the life insurance policy, it can claim the cost of the premiums as a business expense and reduce its Corporation Tax bill. However, the policy must form part of your director remuneration package to satisfy HMRC’s ‘wholly and exclusively’ rules for business expenses.

2. Not treated as a ‘benefit in kind’  

Generally, HMRC won’t treat relevant life insurance as a ‘benefit in kind’ if the employer fully funds the premiums. Therefore, neither you nor your company will pay tax or National Insurance on the value of the insurance premium, and you won’t need to declare the payments in a P11D form each year. 

However, this tax treatment won’t apply if the employee pays the premiums indirectly through a salary sacrifice arrangement. In such instances, the company and employee may be liable to taxation under the benefit-in-kind rules. 

3. Minimise personal tax liability

When you take out personal life insurance, you pay for the premiums from your own pocket, using personal funds on which you’ve already paid Income Tax and National Insurance contributions.

In contrast, your company will pay the premiums on relevant life insurance using pre-tax business funds, helping to minimise your personal tax liability. The savings can be substantial if you’re a higher-rate or additional-rate taxpayer.

4. Not liable to Inheritance Tax 

In most cases, any cash sum paid to your beneficiaries should not form part of your estate for Inheritance Tax purposes. This is because relevant life insurance policies are written into a discretionary trust. Additionally, the payment should be free from UK Income Tax, National Insurance contributions, and Capital Gains Tax.

5. No impact on pension allowance 

Any relevant life cover payout won’t count towards your pension lump sum and death benefit allowance because relevant life plans are non-registered (‘excepted’) schemes, which don’t fall under pension legislation. This is beneficial if you have substantial pension funds.

6. Can be used to top up group life insurance benefits 

Some group life policies can be more restrictive by disregarding dividends, bonuses, overtime, and benefits in kind when considering an employee’s total remuneration. In certain situations, employers can use relevant life insurance to help members of an established group life scheme top up their existing benefits tax-efficiently.

Eligibility requirements for relevant life insurance 

While most commonly used by limited company directors, any employer can arrange relevant life insurance upon satisfying the following legislative requirements:

• The employer must be a UK-resident business, whether a limited company, limited liability partnership (LLP), limited or general partnership, or sole trader. 
• The insured individual must be a UK-resident employee, salaried director, or salaried partner of the policyholder.
• Limited company shareholders are not eligible unless they are also employees. 
• Non-salaried directors, sole traders, and self-employed partners (equity partners) cannot insure themselves with relevant life cover. However, they can arrange a policy on the life of any employee, salaried director, or salaried partner.
• Tax avoidance must not be the sole purpose of arranging relevant life insurance. The policy must be wholly and exclusively for business purposes to qualify as a tax-deductible business expense.
• This type of policy only covers an employee up to the age of 75 years.
• The policy does not have a surrender value or provide any other benefit.

These rules are set out in subsection 393B(4) of the Income Tax (Earnings and Pensions) Act 2003.

How to find relevant life insurance as a limited company director

Most life insurance providers in the UK offer relevant life policies, but the premiums and types of cover available will vary considerably between insurers. It’s always worth shopping around to obtain and compare different quotes. 

Ideally, you should speak to an independent financial advisor or specialist insurance broker to help you find the most appropriate and tax-efficient life insurance for your circumstances. Alternatively, you can use comparison websites or research individual insurers online and contact them directly. 

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Explore the Quality Company Formations Blog for limited company guidance and general business advice. Look at QCF’s homepage if you want to form a limited company. You can start by checking if your company name is available at Companies House.