Relevant Life Policy Guide 2026: Tax-Efficient Cover

Quick answer

A relevant life policy is single-life death-in-service cover that your company buys and pays for. In 2026/27 the premiums are usually deductible against corporation tax, the cost is not treated as a benefit in kind on you, and the payout is written in trust so it normally sits outside your estate for inheritance tax. It is the most tax-efficient way for many small-company directors to hold life cover.

What a relevant life policy actually is

A relevant life policy (RLP) is a term life insurance contract. The crucial difference from ordinary life cover is the parties involved: the employer is the policyholder and premium payer, and the cover protects a named employee. That employee can be a salaried director, which is why RLPs are so popular with small limited companies.

The plan pays a lump sum if the insured employee dies during the policy term, and most plans also pay out on diagnosis of a terminal illness with limited life expectancy. The money is paid to a discretionary trust, and the trustees then distribute it to the chosen beneficiaries, typically the family.

It is best understood as a "death in service" benefit for companies that are too small to run a group life scheme. Group schemes usually need several members. An RLP lets a one-person or small company replicate the same benefit for one or a handful of key people.

How the tax treatment works in 2026/27

The appeal of an RLP is structural. Compare three ways of funding GBP-for-GBP the same cover.

The two big savings are at the company level and the personal level.

Corporation tax relief

Premiums are normally treated as an allowable business expense, provided the cost is "wholly and exclusively for the purposes of the trade" and the plan is set up correctly. If allowable, the premium reduces taxable profit. In 2026/27, corporation tax is 19% on profits up to GBP 50,000, 25% on profits above GBP 250,000, and tapers via marginal relief between those points. So a deductible premium can save you 19% to 25% of its cost. Model your own profit band with the

calculator.

No benefit in kind

When you fund personal life insurance, you pay the premium out of income that has already suffered income tax (20%, 40% or 45% in England, Wales and Northern Ireland) and employee National Insurance (8% up to GBP 50,270, then 2%). A higher earner therefore needs a large gross salary to net the cash for a premium.

With an RLP the company pays directly, and the premium is not normally treated as a benefit in kind. That means no income tax and no employee or employer National Insurance on the cost. For a higher-rate taxpayer this is a meaningful saving on the same amount of cover. To see how much gross pay you would otherwise need to fund a premium personally, run the numbers through the

calculator.

The inheritance tax advantage

A standard RLP is written in a discretionary trust from the start. Because the policy proceeds are held in trust, they do not normally form part of the deceased employee's estate.

This matters for inheritance tax (IHT). In 2026/27, IHT applies at 40% on the value of an estate above the available nil-rate band of GBP 325,000, plus a residence nil-rate band of up to GBP 175,000 where a home passes to direct descendants. The rate drops to 36% where 10% or more of the net estate is left to charity. A large untrusted life policy payout could push an estate over those thresholds. Held in trust, the RLP payout normally bypasses this and reaches beneficiaries without probate delay. Use the

calculator to see where your estate sits against the nil-rate bands.

Who can and cannot use one

An RLP depends on an employer-employee relationship. That shapes eligibility.

• Salaried company directors: yes. This is the core market.
• Ordinary employees: yes, an employer can cover individual staff.
• Sole traders covering themselves: no. A sole trader is not an employee of a company.
• Equity partners in a partnership: generally no, for the same reason.

There are also broad age and term limits. RLPs are term plans, and insurers typically cap the age to which cover can run, because the policy is meant to mirror an employment-linked death-in-service benefit rather than whole-of-life cover. Check the specific insurer's maximum age and term.

Relevant life vs other routes

The decision usually comes down to your structure. If you trade through a limited company and draw a salary, the RLP route is hard to beat on tax. If you are a sole trader, you cannot use an RLP on yourself, so personal cover written in trust is the standard answer.

How much cover, and what it costs

The premium depends on the sum assured, your age, health, smoker status and the term, so there is no headline price. What is predictable is the structural saving: the company pays from pre-tax profit, you avoid income tax and National Insurance, and the payout normally escapes IHT.

On the sum assured, insurers generally allow a multiple of your total remuneration, and that multiple is usually more generous for younger lives. Because dividends do not always count as remuneration for this purpose, directors who pay themselves a small salary plus dividends should check how the insurer calculates the maximum. If you want to model the salary side of your package, the

calculator shows how salary, tax and National Insurance interact in 2026/27.

Setting one up correctly

The tax advantages only hold if the policy is structured properly. The essentials are:

1. The policyholder is the company, and the life assured is the employee or director.
2. The plan is a recognised relevant life product, not ordinary term cover repurposed.
3. The policy is written in the insurer's approved discretionary trust from outset.
4. The company can satisfy the "wholly and exclusively" test for the premium.
5. There is no surrender value and no investment element, keeping it pure protection.

Get any of these wrong and you risk losing corporation tax relief, triggering a benefit-in-kind charge, or dragging the payout back into the estate. This is why an accountant and a protection adviser should both be involved.

Common pitfalls

• Bundling in full critical illness cover, which sits outside the rules and can void the tax treatment. Arrange that separately.
• Forgetting the trust, or completing it late, which can undermine the IHT position.
• Sole traders or partners assuming they qualify on themselves. They do not.
• Assuming relief is automatic. It depends on meeting the "wholly and exclusively" test.
• Letting cover lapse on leaving the company without using a continuation option.

The bottom line

For a small-company director with no group scheme, a relevant life policy is usually the most efficient way to hold life cover in 2026/27. The company funds it, often with corporation tax relief; you face no income tax or National Insurance on the premium; the GBP 60,000 pension annual allowance is untouched; and the trust-held payout normally avoids 40% inheritance tax. The conditions are strict, so set it up with professional advice, but for the right person the savings against personal cover are substantial.

This article is general information, not personal financial or tax advice. Confirm your own position with a qualified adviser and check current rules at gov.uk before acting.