A relevant life policy is a life insurance policy taken out and paid for by an employer that pays a lump sum on the death of a single employee or director, usually through a trust, to their family or other individuals or charities. If it meets the conditions, the premiums are not a taxable benefit for the director under section 307 ITEPA 2003, no Class 1A National Insurance arises and the payout is outside the employer financed retirement benefits charge. The company’s corporation tax deduction is not automatic and depends on the premiums being paid wholly and exclusively for the trade.

What exactly is a relevant life policy?

The term comes from the employer financed retirement benefits scheme (EFRBS) rules in section 393B ITEPA 2003, read with sections 480 to 482 ITTOIA 2005. HMRC’s Employment Income Manual at EIM15045 explains that a payment from an employer’s life policy would normally be a “relevant benefit” taxed under the EFRBS rules, but a payment from a relevant life policy is an excluded benefit and is not charged by section 394.

EIM15045 describes three types. The one used for an individual director is a policy on a single life that would meet the excepted group life policy conditions if those referred to one person. Those conditions are:

  • a capital sum is payable on the death in any circumstances of the insured person, if they die under a specified age that does not exceed 75
  • there is no surrender value, and the only sums or benefits are those permitted
  • the beneficiaries are restricted to individuals and charities
  • tax avoidance is not a main purpose of the policy

A policy can also qualify if it adds certain excluded benefits, such as benefits for ill health or disablement of the employee during service, or for death by accident during service.

How is it different from key person cover?

The two are often confused. Key person insurance is taken out by the company in its own favour to protect it against lost profits if a key individual dies or falls ill. HMRC’s Business Income Manual at BIM45525 deals with it: the company is the beneficiary and, where the conditions are met, premiums are deductible and the policy proceeds are taxed as trading income.

A relevant life policy works the other way round. The money goes to the director’s family or other chosen individuals, not to the company. Because the beneficiaries must be individuals or charities, the company itself, a lender or another business cannot be a beneficiary.

Is the director taxed on the premiums?

Normally not. Section 307 ITEPA 2003 prevents a benefits code charge on the expense an employer incurs in providing an employee with a pension, annuity, lump sum, gratuity or similar benefit payable on death or retirement. HMRC’s guidance at EIM21800 confirms this, and notes that from 6 April 2019 the exemption covers provision made for the employee, any other individual or a charity recognised by HMRC.

Two limits are worth knowing. First, section 307 is an earnings only exemption, so it does not stop a charge arising under some other provision. Second, where a policy mixes qualifying death cover with other cover, the exempt element can be apportioned only if it and its cost can be separately identified; if they cannot be separated, the exemption does not cover the cost.

EIM15045 also notes that paying premiums to fund the policy does not attract a charge under the EFRBS provisions.

What about National Insurance?

Class 1A National Insurance is only due on benefits chargeable to income tax as general earnings, and HMRC’s guide CWG5 lists benefits exempt from income tax among those on which Class 1A is not due. A properly set up relevant life policy therefore carries no Class 1A charge, and nothing is reported on a P11D.

Who holds the contract is critical. The CWG5 table treats insurance premiums for benefits on death or retirement as liable to Class 1 National Insurance where the employee holds the contract and the employer pays. In that case the employer is simply meeting the employee’s own debt. So if a director takes out a personal life policy and the company pays the premiums, or reimburses them, the payment is pay for National Insurance and PAYE purposes. The policy must be the company’s contract from the start. Our guides to Class 1A National Insurance and benefits in kind explain the wider rules.

Can the company deduct the premiums for corporation tax?

There is no specific statutory relief for relevant life premiums, so the general rules apply. The premiums must be revenue expenditure and must be incurred wholly and exclusively for the purposes of the trade, under section 54 CTA 2009.

HMRC’s approach to directors’ remuneration packages is shown in BIM46035, written for pension contributions for controlling directors. It asks whether the package as a whole is excessive for the work done, and accepts that it is paid wholly and exclusively where it is comparable with the package paid to unconnected employees doing work of similar value. Where only part of an expense fails the test, only that part is disallowed. In practice, cover that sits sensibly within a director’s overall pay is easier to support than cover that looks designed to protect the value of the director’s estate.

BIM45530, on key person policies, gives a warning sign that HMRC watches for: cover on directors who are major shareholders but not other employees, or benefits that exceed what employees of similar status usually receive. That guidance is about key person cover, but the same wholly and exclusively test sits behind both. For the parallel rules on pensions see when company pension contributions are deductible.

How is the payout taxed?

Because a relevant life policy is an excluded benefit, the death benefit is not charged under section 394 ITEPA 2003, according to EIM15045. Employers often hold the policy in a discretionary trust so that the trustees can pay the money to the intended beneficiaries. EIM15045 also points out that if the trust is a registered pension scheme the relevant life rules cannot apply, and the pension tax rules take over instead. The inheritance tax position depends on the trust, which our guide to life insurance written in trust covers.

How does this compare with paying personally?

Illustration only. Priya is the sole director and shareholder of a trading company. She wants £500,000 of life cover for her family and the premium is £600 a year.

  • Personal policy paid from her own income: Priya pays £600 out of salary or dividends that have already been taxed. The company gets no deduction for that cost.
  • Personal policy, premiums paid by the company: the company is meeting Priya’s own contract, so the £600 is treated as pay, with PAYE and Class 1 National Insurance due.
  • Relevant life policy owned by the company, written in trust: no benefits code charge under section 307, no Class 1A and no Class 1. The company claims a deduction for the £600 if it can show the cost is part of a commercial remuneration package.

This is why the product is popular with owner managed companies, and why the deciding point in any salary and dividend planning is who owns the contract.

What mistakes come up most often?

  • Putting the policy in the director’s own name and having the company pay. That turns the premium into pay.
  • Naming the company, a lender or a business partner as beneficiary, which breaks the individuals and charities condition.
  • Choosing a policy with a surrender value or investment element, or cover running beyond age 75.
  • Bundling other cover into the same premium without a separate cost, so the section 307 exemption cannot be apportioned.
  • Assuming the corporation tax deduction is guaranteed. It rests on the wholly and exclusively test, and on HMRC accepting that the cover is commercial.
  • Using one for a sole trader or partner. The policy works through an employment, so there must be an employer paying for an employee or director.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.