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%.