A relevant life policy lets a company pay for an employee's or director's life insurance as a tax-deductible business expense, with no Income Tax or National Insurance charge on the premiums and a payout that stays outside the estate for Inheritance Tax. This guide explains how it works and when it makes sense.
What a Relevant Life Policy Is
A relevant life policy is an individual life insurance policy taken out by an employer on the life of an employee or director, paying a tax-free lump sum to the employee's family if they die while the policy is in force. It is designed to give small companies, including single-director businesses, a tax-efficient alternative to group life cover, which usually requires a minimum number of staff to be commercially viable.
Tax Treatment for the Company
Premiums paid by the employer are generally an allowable business expense for Corporation Tax purposes, provided the arrangement meets HMRC's wholly and exclusively test, in the same way as other legitimate staff benefit costs, reducing the company's taxable profits by the cost of the premiums.
Tax Treatment for the Employee
Premiums paid by the employer into a relevant life policy are not normally treated as a benefit in kind, so there is no Income Tax charge on the employee and no employer or employee National Insurance due on the premium -- a key advantage over funding personal life cover from post-tax income or through many other employer-paid benefits.
Inheritance Tax and the Trust
A relevant life policy is written in an appropriate discretionary trust from the outset, so the payout goes directly to the beneficiaries named in the trust rather than into the deceased's estate, keeping the lump sum outside the estate for Inheritance Tax purposes and allowing the family to receive the payment more quickly, without waiting for probate to be granted.
Who It Suits
Relevant life policies are aimed at employees and directors of limited companies, including single-director companies, rather than sole traders or partners, since the arrangement depends on an employer-employee relationship for the premium to be treated as a business expense. Cover is usually capped at a multiple of the employee's remuneration, similar to how many group life schemes set benefit levels.
Frequently Asked Questions
What is a relevant life policy?
A relevant life policy is an individual life insurance policy taken out by an employer on the life of an employee or director, paying out a tax-free lump sum to the employee's family if they die while the policy is in force, structured so the premiums are paid by the company but the benefits are kept outside the employee's estate for Inheritance Tax purposes.
Why would a small company use a relevant life policy instead of group life cover?
Group life schemes usually require a minimum number of employees to be commercially viable, which puts them out of reach for many small companies or sole director-owned businesses; a relevant life policy provides broadly similar death-in-service style cover for a single employee or a small number of employees without needing a group scheme.
Are the premiums tax-deductible for the company?
Generally yes -- premiums paid by an employer for a relevant life policy are usually an allowable business expense for Corporation Tax purposes, provided the arrangement satisfies HMRC's wholly and exclusively test for business expenses, in the same way as other legitimate staff benefit costs.
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Does the employee pay Income Tax or National Insurance on the premiums?
No -- premiums paid by the employer into a relevant life policy are not normally treated as a benefit in kind for the employee, meaning there is no Income Tax charge on the employee and no employer or employee National Insurance due on the premium, unlike many other employer-funded benefits.
How does the payout avoid Inheritance Tax?
A relevant life policy is written in an appropriate discretionary trust from the outset, so the payout goes directly to the beneficiaries named in the trust rather than into the deceased's estate, keeping the lump sum outside the estate for Inheritance Tax purposes and allowing a faster payment to the family without waiting for probate.
Who can take out a relevant life policy?
Relevant life policies are aimed at employees and directors of limited companies, including single-director companies, rather than sole traders or partners, since the policy relies on an employer-employee relationship for the premium to be treated as a business expense rather than personal expenditure.
What happens to the policy if the employee leaves the company?
If the employee leaves, the policy can sometimes be transferred to a new employer if the individual takes up a new role elsewhere, or it may lapse or be converted to an individual policy paid for personally, depending on the specific product terms and provider -- checking the policy conditions before relying on continuity of cover is important.
Is there a maximum amount of cover under a relevant life policy?
Providers typically apply a maximum multiple of the employee's remuneration (including salary, dividends in some cases, and benefits) when calculating how much cover can be provided, broadly similar to how group life scheme benefit levels are often set, rather than allowing unlimited cover regardless of earnings.
Can a relevant life policy cover critical illness as well as death?
Standard relevant life policies are primarily life cover only and generally cannot include full critical illness cover within the same tax-efficient wrapper, since HMRC rules on relevant life policies are specifically about death benefits -- some providers offer limited additional terminal illness cover, but comprehensive critical illness protection is usually arranged as a separate policy.
Is a relevant life policy right for every company director?
It depends on the director's personal circumstances, existing life cover, and whether the tax efficiency of employer-paid premiums outweighs any product limitations compared with a personal life insurance policy -- comparing the net cost after tax relief against a personal policy, and taking advice on the trust arrangement, is worthwhile before setting one up.
Disclaimer: This guide reflects general relevant life policy tax treatment for 2026/27, including the £325,000 Inheritance Tax nil rate band context for trust planning. This guide is for general information only and is not professional advice. Consult a qualified adviser and refer to gov.uk for current official guidance before relying on any treatment.
