Friendly society tax exempt savings plans

A friendly society tax exempt policy is a small regular premium savings plan, usually a ten year endowment, on which the society pays no corporation tax on the investment return and the policyholder pays no income tax on the payout, as long as the policy meets the special qualifying policy rules. For policies made on or after 1 May 1995 the premiums across all of one person’s tax exempt policies must not exceed £270 in any 12 months, or £300 where premiums are paid more often than yearly. Cashing the plan in during its first ten years can create a taxable gain with no basic rate tax credit.

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What is a friendly society tax exempt policy?

Part 3 of the Finance Act 2012 exempts them from corporation tax on life insurance business written with members, provided the premiums stay within set limits. HMRC’s manual at IPTM8405 calls this tax exempt business.

The exemption in the society’s books does not by itself make the payout tax free for you. To be free of tax in the policyholder’s hands, the policy must also be a qualifying policy under the special rules in paragraph 3 of Schedule 15 to the Income and Corporation Taxes Act 1988. A policy that passes both tests is often called a tax exempt savings policy, or TESP. A tax exempt policy written before 19 March 1985 is automatically qualifying unless it has been varied since then.

HMRC confirms there are no age restrictions on who can hold one, and children often do. A non resident can also hold a tax exempt policy, although members are usually UK resident.

How much can you pay in each year?

For a policy made on or after 1 May 1995, section 155 of the Finance Act 2012 caps premiums at £270 in any 12 month period, or £300 if premiums are paid more often than annually, for example monthly or quarterly. The cap applies per person, not per policy: you can hold several tax exempt policies with one society or several societies, but the total premiums payable under all of them in any 12 months must stay within the limit.

Joint policies do not double the limit. IPTM8415 explains that where two members hold a policy jointly, both are treated as holding the whole policy, so neither can take out another tax exempt policy without breaching the cap. The test looks at who holds the policy, not whose life is insured, so a policy on two lives held by one person uses only that person’s limit.

Older policies have lower limits. IPTM8445 sets them out:

Policy made	Annual premium limit	Limit if paid more often than yearly
On or after 1 May 1995	£270	£300
25 July 1991 to 30 April 1995	£200	£222.22
1 September 1990 to 24 July 1991	£150	£166.66
1 September 1987 to 31 August 1990	£100	£111.11

Before September 1987 the test was on the sum assured instead: no more than £750 for policies made from 14 March 1984, and £500 before that. Someone holding a pre May 1995 policy cannot hold further tax exempt policies whose combined premiums exceed the limit that applied when that older policy was made.

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What happens if you go over the limit?

The policy that breaches the limit, and any later policy taken out in the same year, cannot be a qualifying policy. Whether it is still the society’s tax exempt business depends on where it sits. IPTM8410 explains that if the breaching policy is with the same society as your earlier valid policies, it falls outside tax exempt business; if it is with a different society, it stays within that society’s tax exempt business but is still not qualifying.

There is no way to repair the breach by taking the excess back out. HMRC’s own example is a member who pays £120, then £220 into a second policy with the same society, then £100 with another society, all monthly within 12 months. The second and third policies both fail, and withdrawing the £40 excess does not turn the second policy back into a tax exempt one.

What conditions must the policy meet?

The special qualifying rules, summarised in IPTM8420 to IPTM8440, include these:

Term. An endowment must run for at least ten years. A policy paying out to someone aged 18 or under may run for five years or more if premiums for any 12 months do not exceed £13.
Premiums. Premiums must be paid at regular intervals, at least yearly, for at least ten years, and must be of equal amounts, or rateable amounts if the payment frequency changes. £20 a month becoming £60 a quarter is fine.
Benefits. A capital sum may be paid only on death, on maturity or earlier death, on maturity or earlier death or disability, or on survival alone (a pure endowment, which must pay at least 75% of the premiums payable over the term).
Interim payments. These are allowed only after at least five years, no more often than every five years, and each, apart from the last, may not exceed four fifths of the premiums paid in the preceding interval.
Commuting premiums. A lump sum can replace the remaining premiums once the policy has run for half its term or ten years if sooner, or if the payer emigrates.

A policy may waive premiums on disability without losing its status. A variation that changes the annual premium, however, breaks the equal premiums rule and makes the policy non qualifying, because the tests are reapplied from the original start date.

How is the payout taxed?

Gains on life policies are normally taxed under the chargeable event rules. For a qualifying policy, section 485 of the Income Tax (Trading and Other Income) Act 2005 switches most events off:

death or maturity is not a chargeable event unless the policy was made paid up within the first ten years or, if sooner, three quarters of its term;
a full surrender or assignment is a chargeable event only if it happens within that same period, or the policy was made paid up within it.

So a tax exempt policy kept going to maturity, or ending on death, pays out free of income tax. If you surrender it early, any gain is taxable, and here friendly society policies are worse than ordinary UK policies. Section 531(3)(a) of the 2005 Act stops the usual basic rate tax credit from applying to policies written as a friendly society’s exempt business, because the society has paid no tax on the fund (IPTM3810). The whole gain is therefore taxed at your rates, although top slicing relief is still calculated and, as IPTM3810 notes, gains can fall within the starting rate for savings and the Personal Savings Allowance.

How does this work in practice?

Illustration only. Priya opens a ten year tax exempt plan at £25 a month, which is £300 a year, the most allowed for a monthly policy. She pays £3,000 in total.

If she keeps paying for ten years and the plan matures at £3,400, the £400 growth is free of income tax and the payout is not a chargeable event.
If she surrenders after six years for £1,950, having paid £1,800, there is a £150 chargeable event gain. No basic rate credit is given. If her Personal Savings Allowance is unused, the gain may still be covered; if she is a higher rate taxpayer who has used it, the gain is taxed at 40% for 2026 to 2027.
If, in year four, she also starts a £10 a month plan with a second society, her premiums total £420 a year, above the £300 cap, so the second plan cannot be qualifying.

Can children hold these policies?

Yes. Each child is a member in their own right with their own premium limit, so a child’s policy does not use a parent’s limit unless the parent is the policyholder. Children’s policies need care over the death benefit. The Friendly Societies Act 1992 lets societies limit the payout on the death of a child under ten to £800 across all policies for that child, but HMRC warns in IPTM8420 that to qualify each policy must pay either the full sum assured or no more than a return of premiums on the death of a child under 16. Following the 1992 Act alone does not guarantee qualifying status. For other tax efficient ways to save for a child, see Junior ISAs and children’s savings.

What mistakes do people make?

Taking out a second plan with another society and breaching the £270 or £300 cap without realising the limit is per person.
Assuming a joint policy gives each holder a separate allowance.
Stopping premiums in the early years. A policy made paid up within the first ten years turns maturity and death back into chargeable events.
Asking the society to increase the premium on an existing plan, which breaks the equal premiums rule.
Expecting a basic rate credit on an early surrender gain, as with an ordinary insurance bond. See chargeable event gains on life policies and top slicing relief for how the gain is taxed.
Confusing a tax exempt plan with a society’s taxable policies. Policies above the limit can still be qualifying under the normal rules in IPTM8005 onwards, but the society’s fund is taxed.

With such a low cap, compare the wider options in ISA tax rules and the Personal Savings Allowance.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.