When margins get tighter, directors usually look in the same places first. Salary. Dividends. Pension contributions. Corporation tax planning. What often gets ignored is an old personal life insurance policy that has been running unchanged for years, even though the business around it has moved on.
That is a common habit. The policy was arranged early, the direct debit still works, and nobody has a strong reason to disturb it. But for many limited company directors, the personal policy is now sitting in the wrong place. The cover may still be fine. The structure often is not.
Relevant life insurance exists for that exact gap. HMRC treats it as employer-funded life cover on a single individual, and says that a payment from an employer’s life policy would normally be a relevant benefit under the employer-financed retirement benefits rules, but a payment made from a relevant life policy is excluded from that charge. It also states that a benefit-in-kind charge may be exempt under section 307, depending on the circumstances (HMRC Employment Income Manual).
The cost most directors do not notice
A personal life policy is usually paid from money that has already been through the business and into the director’s hands. In practical terms, that means the company makes the profit, tax is dealt with, income is extracted, and only then is the premium paid. That may have felt fine when the business was small. It is less attractive once every pound matters more.
With relevant life, the company pays the premium directly. HMRC says the qualifying element is exempt from tax under the benefits code where section 307 applies, and HMRC’s National Insurance manual says that where no tax is chargeable because a statutory exemption exists, no Class 1A National Insurance liability arises. The table of exempt benefits specifically includes provision of a benefit to be given on death or retirement under section 307 (HMRC Employment Income Manual, HMRC National Insurance Manual).
That is why relevant life is usually described as more tax-efficient than a personal policy. The premium is not being funded from already-taxed personal income, and in the right setup it does not create the usual P11D benefit-in-kind problem.
The corporation tax point is worth handling properly
This is where a lot of copy becomes too casual. It is easy to say relevant life is an allowable expense and stop there. HMRC’s own wording is more careful. Revenue expense can be deducted from company profit only if it is not specifically disallowed and only has a business purpose under the wholly and exclusively principle. Whether insurance premiums are deductible depends on what is insured and whether the insurance has been taken out for the purposes of the trade (GOV.UK, HMRC).
A simple example using real-world director behaviour
Take a director who already has a personal life insurance policy costing £100 a month. They pay themselves a tax-efficient mix of salary and dividends, and the policy premium goes out of their personal account every month without much thought.
If equivalent cover is arranged as relevant life instead, the premium is paid by the company rather than from the director’s already-taxed personal income. If the arrangement qualifies, the premium is not treated as a benefit in kind, there is no Class 1A NIC on that exempt benefit, and the company may also obtain corporation tax relief on the premium. That is where the financial saving comes from. It is not one single tax break. It is the combined effect of better structure.
So the honest version is this: relevant life is typically treated as deductible when it is set up correctly and the facts support that treatment, but it is not something to describe as automatic in every case. That nuance is useful. It is also the difference between proper advice and marketing shorthand.
Why the trust matters just as much as the policy
The tax efficiency gets most of the attention. The trust is often the more practical point.
Insurance policies are often written into trust for estate planning and to ease the distribution of funds following death. Separately, where the deceased is both the life assured and the policyholder, the proceeds form part of the estate and, in most cases, the insurer will postpone payment until it has proof of title, usually probate or letters of administration (HMRC Trust Registration Service Manual, HMRC Inheritance Tax Manual).
That is the practical difference. A relevant life policy written in trust is designed to keep the payout moving towards the intended beneficiaries, rather than forcing the money through the estate first. In normal cases, that also means the proceeds are kept outside the estate for inheritance-tax purposes because HMRC’s manual makes clear that personally owned policies form part of the estate, while trust ownership is commonly used for estate planning instead.
On the income-tax point, the careful way to say it is that HMRC excludes payments from a relevant life policy from the employer-financed retirement benefits charge that would normally apply to an employer’s life policy. That is why the payout is not being taxed as employment income under those rules.
What this looks like in practice
Take a director with a profitable limited company, a partner, children and a mortgage. The business is run carefully. Dividends are planned. Costs are watched. Their life insurance, though, is still a personal policy taken out years ago.
If that director dies unexpectedly, a personally owned policy will usually form part of the estate, and HMRC says insurers will often wait for probate documents before paying. That can leave the family dealing with the business, the household and the legal process all at once (HMRC Inheritance Tax Manual).
Now take the same need for cover but arrange it as relevant life through the company and write it into trust from the start. The company pays the premium. The qualifying element can fall outside the benefits charge. No Class 1A NIC is due where the exemption applies. The trust is there to direct the proceeds to the family without relying on the estate process in the same way. The cover is still there to protect the family, but the route the money takes is cleaner and, in most cases, quicker.
This is not a fit for every director
Relevant life is useful because it is narrow. It is employer-funded cover on a single individual, with conditions around beneficiaries, age and the nature of the policy. That means it is not a catch-all replacement for every type of life cover, and it should not be treated as one.
The same applies to the trust. If it is not completed properly, a large part of the practical value is lost. The policy and the trust work together. One without the other is only part of the job.
The useful takeaway
If taxes are rising and you are looking for waste, do not just review the obvious items. Review the personal life policy that may have been quietly draining post-tax income for years.For many business directors, relevant life insurance is not about buying more cover. It is about putting the cover in the right place. Done properly, it can be paid by the company, avoid the usual P11D treatment where the exemption applies, support corporation tax relief subject to HMRC’s rules, and, when written in trust, help the payout reach the family without being dragged through probate in the usual way. That is a practical saving, not a theoretical one.
