Should your limited company pay for your life insurance?
Relevant life insurance is a life policy your company takes out on you and pays for. The premiums are normally an allowable expense, nothing is added to your pay, and the lump sum reaches your family free of income tax. This article covers how it works, what it saves at 2026/27 rates and the rules that keep it inside the tax treatment.
By IQ Money Editorial Team. Updated 15 October 2026. 11 minute read. Rates and allowances are for the 2026/27 tax year and were correct at the time of writing.
- Summary
- What relevant life insurance is
- Who can have it
- How the tax works
- Worked example, £100 a month three ways
- The same sums at the basic rate
- The rules the policy must meet
- How much cover you can have
- Leaving or closing the company
- Relevant life or a group scheme
- Mistakes that cost money
- What to do
- Questions owners ask
Summary of relevant life insurance for a director
- Relevant life insurance is a term life policy your company owns and pays for on your life. It pays a lump sum to your family if you die or are diagnosed with a terminal illness during the term.
- The premiums are normally an allowable expense for corporation tax. They are not a benefit in kind, so there is no income tax or National Insurance on them for you and no employer National Insurance for the company.
- On a £100 a month premium, a higher rate director whose company pays the main rate keeps £884.48 a year against paying it from salary and £967.70 against paying it from dividends. Over 20 years that is £17,690 or £19,354.
- You have to be an employee. A director on the payroll counts. Sole traders, partners and LLP members cannot have it for themselves.
- The policy is written into a trust from day one. The payout normally sits outside your estate for inheritance tax and does not count towards your pension allowances.
- It only pays on death or terminal illness, must have no surrender value and must end by age 75. Break those rules and the tax treatment goes.
- Every rate, allowance and limit in this article was correct at the time of writing for the 2026/27 tax year. Rates change at Budgets and insurers change their limits, so check the current figures before you act.
What relevant life insurance is
Most owners of small companies who have life cover pay for it personally. The premium goes out of a current account every month, from money that has already been through corporation tax and then income tax or dividend tax. Relevant life insurance moves the policy into the company.
The company takes out the policy on your life, owns it and pays the premiums. The benefit is written into a discretionary trust from the start, with your family as the people the trustees can pay. If you die during the term, or an insurer confirms a terminal illness with less than twelve months to live (included as standard by the main insurers on policies of two years or more), the lump sum is paid to the trustees and passed to your family.
It is the same kind of cover that larger employers provide as death in service, but set up for one person at a time. It suits a company with one or two directors and a few staff. A group death in service scheme usually needs a minimum number of employees before an insurer will quote. Relevant life insurance has no minimum.
The tax treatment rests on three pieces of law. The policy has to fit the definition of a relevant life policy in section 393B of the Income Tax (Earnings and Pensions) Act 2003. The employer's cost of providing a death benefit is exempt from the benefit in kind charge under section 307 of the same Act. And the premiums are a trading expense for the company under the usual wholly and exclusively test. Each part has conditions. This article goes through them.
Who can have it
The person covered has to be an employee of the company. A director on the payroll counts even where most of what they take is dividends. A salaried partner on a firm's payroll also counts. The company has to be UK resident and the employee has to be UK resident.
The people who cannot have it for themselves are the ones who are not employees. A sole trader is not an employee of their own business. Neither is a partner in an ordinary partnership, nor a member of an LLP. A shareholder who takes no salary and is not on the payroll is usually refused as well. If you are in one of those positions, a personal policy is the route, and the premium is paid from taxed income.
A sole trader or partnership with employees can still set up relevant life insurance for those employees, because the rules turn on the person covered being an employee. The business pays and claims the premiums in the same way.
| Who | Can the business cover them? | Why |
|---|---|---|
| Director on the payroll | Yes | An employee of the company, whatever the mix of salary and dividends |
| Employee of a limited company | Yes | The policy was designed for this |
| Salaried partner on the payroll | Yes | Treated as an employee |
| Employee of a sole trader or partnership | Yes | The business is the employer and pays the premium |
| Sole trader, for themselves | No | Not an employee of the business |
| Partner or LLP member, for themselves | No | Not an employee of the partnership |
| Shareholder with no salary | No | Not on the payroll, so not an employee |
How the tax works
There are four places tax could touch a life policy. Relevant life insurance deals with each one.
Corporation tax on the premiums
The premiums are normally an allowable expense, so they come off profit before corporation tax. At the main rate of 25% a £1,200 premium costs the company £900 after relief. At the small profits rate of 19% it costs £972. The premium has to pass the usual test for any expense, that it is incurred wholly and exclusively for the trade. Insurers put it as the policy forming part of the employee's remuneration package. HMRC also expects term insurance that pays only on death, with no investment element, since a policy with a surrender value is capital spending and not deductible. Your accountant confirms the deduction when the accounts are done.
Income tax and National Insurance on the premiums
Nothing is added to your pay. Section 307 of the Income Tax (Earnings and Pensions) Act 2003 exempts an employer's cost of providing a death or retirement benefit for an employee from the benefit in kind rules, so the premiums do not appear on a P11D. You pay no income tax or employee National Insurance on them and the company pays no employer National Insurance. HMRC applies the exemption to the qualifying cover only. Where a policy mixes in cover that does not qualify and the cost cannot be separated, the exemption is lost, which is one reason relevant life products stay as death cover alone.
Tax on the payout
The lump sum is not income, so there is no income tax or National Insurance on it. It is paid to the trustees of the policy trust and passed to your family. There is no capital gains tax on a life policy payout of this kind.
Inheritance tax and pension allowances
Because the trust owns the benefit from day one, the payout normally sits outside your estate for inheritance tax and is paid without waiting for probate. A relevant life policy is also not a registered pension scheme, so the lump sum does not count towards the lump sum and death benefit allowance of £1,073,100. Lump sum death benefits paid from a registered pension scheme do count towards that allowance, which matters if your pension pot is already large or the company is putting profit into a pension each year.
The trust can have charges of its own in some situations. Unused pension funds and most pension death benefits come into inheritance tax for deaths from 6 April 2027, although death in service paid from a registered pension scheme is excluded from that change, so the change does not alter the comparison above. The money normally goes out to the family quickly, which keeps those charges small or nil, but have whoever advises on your estate look at the trust alongside your will.
£100 a month of life cover, paid three ways
A director with a salary already above £50,270, so extra salary carries 40% income tax and 2% National Insurance, who has used the dividend allowance. The company pays corporation tax at the main rate of 25%. The premium is £100 a month, £1,200 a year. Each route is measured by how much of the company's profit it uses to put £1,200 into the policy.
From salary
From dividends
Relevant life policy
Salary route is £1,200.00 divided by 0.58 for the gross, plus 15% employer National Insurance, less 25% corporation tax on the whole cost. Dividend route is £1,200.00 divided by 0.6425 for the dividend, which comes out of profit that has already paid 25% corporation tax. The salary route assumes the company's Employment Allowance is already used or not available. Premiums are illustrative. A real quote depends on age, health, smoking status, term and the sum assured.
The same sums at the basic rate
The saving is smaller when the director is a basic rate taxpayer and the company pays the small profits rate, but it is still there. Same £1,200 premium, a salary above the personal allowance so extra salary carries income tax at 20% and employee National Insurance at 8%, dividend tax at 10.75% and corporation tax at 19%.
| Route | Working | Profit after tax used | Against relevant life |
|---|---|---|---|
| From salary | £1,200.00 divided by 0.72 is £1,666.67 gross. Employer NI at 15% adds £250.00, so £1,916.67. Less 19% relief of £364.17. | £1,552.50 | £580.50 more, 37.4% |
| From dividends | £1,200.00 divided by 0.8925 is £1,344.54, paid from profit that has already paid corporation tax. No relief. | £1,344.54 | £372.54 more, 27.7% |
| Relevant life policy | £1,200.00 premium, less 19% relief of £228.00. No National Insurance, no benefit in kind. | £972.00 | Baseline |
The pattern holds at every rate. The company route is cheaper because the premium is taxed once, through corporation tax relief, instead of being paid out of money that has been taxed at the company and again in your hands. For a company with profits between £50,000 and £250,000, marginal relief means each pound of allowable expense saves 26.5p of corporation tax, so the relief on the premium is slightly larger than in the main rate example.
The rules the policy must meet
The tax treatment depends on the policy fitting the legal definition. Insurers design relevant life products to fit it. The conditions still matter, because a change to the policy or to how the money is paid can take it outside them.
- It only pays on death. The policy pays a lump sum on death, and insurers treat a terminal illness diagnosis as an early payment of that sum. It cannot have payments tied to any other event, and insurers do not offer critical illness cover on these policies. A policy that pays out on other events risks falling outside the definition.
- It has no surrender value. There is no investment element and nothing to cash in. The only other payment allowed is a refund of premiums for a period not yet used.
- It ends by age 75. The policy must stop before the insured person's 75th birthday. Most insurers set a maximum entry age of 73 and a maximum term that lands before 75.
- The money goes to individuals or charities. The benefit is paid to people, usually your family, or to a charity if you name one. Paying through a trust is fine and is how insurers set it up. The company cannot receive the money and neither can a lender with first call on it.
- It cannot be a buy-out policy. A policy that pays your fellow shareholders so they can buy your shares is shareholder protection. That is a different product with different tax rules and the two are not interchangeable.
- Tax avoidance is not a main purpose. The policy has to be there to provide a death benefit for an employee. Set up for that reason, with the premium a normal part of a remuneration package, it meets the test.
None of this stops the policy being level, increasing or decreasing cover, or being set for whatever term you choose up to the age limit. Those are ordinary choices on any term policy.
How much cover you can have
Insurers cap the sum assured at a multiple of your remuneration, and the multiple falls with age. One large insurer's limits are typical.
| Age when you apply | Maximum cover | On remuneration of £72,570 |
|---|---|---|
| 18 to 49 | 25 times remuneration | £1,814,250 |
| 50 to 59 | 20 times remuneration | £1,451,400 |
| 60 to 73 | 15 times remuneration | £1,088,550 |
Remuneration means more than salary. Legal & General, for example, includes bonuses, benefits in kind and regular dividends from your own company, which is what makes the limit workable for a director who takes a small salary and the rest as dividends. Limits differ between insurers, so ask before you assume.
How much you need is a separate question from how much you are allowed. A simple way to size it is to add what you would want cleared to what you would want replaced.
Sizing the cover for a director aged 45
Salary of £12,570 and dividends of £60,000 a year, so remuneration of £72,570. A mortgage of £240,000 and household spending of £30,000 a year that the family would need for 15 years.
What to clear
What to replace
Cover needed
Spending figures are illustrative. Many owners also add a sum for the children's education, for the company to be wound up in good order, or for company borrowing they have personally guaranteed. Inflation erodes a level sum over a long term. Increasing cover exists for that reason.
Leaving or closing the company
The company owns the policy, so the obvious question is what happens when you and the company part. Most insurers include a continuation option. If you move to a new employer, that company can take over the policy and keep paying. If you stop being an employee altogether, you can usually convert it into a personal policy, paid by you from taxed income, without new medical underwriting if you act within the insurer's time limit. Ask what the limit is when you take the policy out. One large insurer allows 90 days from the date you leave.
If the company is dissolved and nobody picks the policy up, the premiums stop and the cover stops with them. The trust stays in place but has nothing to pay out. For a director planning to close the company and retire before the policy ends, the continuation option is the thing to check first.
If you sell the company, the buyer takes on the policy as an employer cost and can keep it or cancel it. Agree what happens to it in the sale.
Relevant life or a group scheme
A group death in service scheme covers everyone in the company under one policy, usually at a fixed multiple of salary, and often without medical questions for each person. Insurers set a minimum number of employees before they will set one up. The minimum varies by insurer, from two or three with some to more with others, so a company with one or two directors is often below it. Below the minimum, relevant life policies, one per person, do the same job.
| Relevant life policy | Group death in service | |
|---|---|---|
| Who it covers | One named employee per policy | All eligible employees under one policy |
| Minimum size | One employee | A minimum number of employees, set by the insurer |
| Cover amount | Chosen per person, up to a multiple of remuneration | A fixed multiple of salary for everyone |
| Medical questions | Underwritten per person | Often free cover up to a limit, then underwriting |
| Pension allowances | Outside them | Lump sums count towards the lump sum and death benefit allowance if run through a registered pension scheme |
| If the employee leaves | Continuation option with most insurers | Cover ends with the job |
| Premiums for the company | Normally allowable | Normally allowable |
A company with twelve staff might run a group scheme for everyone and a separate relevant life policy for a director whose pension is already near the allowance. A company with three people runs three relevant life policies, or one for the director who has a mortgage and a family and none for the two who have decided they do not need it.
Mistakes that cost money
- Paying for cover personally when the company could pay. This is the one the worked example measures. On a £100 a month policy at the higher rate it is £968 a year of profit spent on tax that the company route avoids.
- Setting the cover on salary alone. A director on £12,570 salary and £60,000 dividends has remuneration of £72,570 with an insurer that counts dividends, rather than £12,570. The limit is roughly six times higher than it looks.
- Running death in service through the pension when the pot is large. A lump sum from a registered scheme counts towards the £1,073,100 lump sum and death benefit allowance. A relevant life policy does not. If the company is also making employer pension contributions, keep the two apart in your planning.
- Letting the policy drift outside the rules. Adding critical illness cover, naming the company as beneficiary or using the policy to fund a share buy-out all take it outside the definition. Each of those needs its own product.
- Forgetting the policy when the company closes. The continuation option has a time limit. Miss it and the cover is gone, and a new personal policy at 60 costs a great deal more than one taken out at 45.
- Leaving the trust unreviewed. The insurer's standard trust is fine for most families, but it should match your will and name trustees who will still be around. Review it when circumstances change.
What to do
- Check you are on the payroll as an employee of the company rather than a shareholder alone. If you are a sole trader, partner or LLP member, this product is not open to you for yourself.
- Work out the sum you want. Debts to clear plus years of spending to replace, with a view on inflation if the term is long. The company version of the same exercise is working out how many months of costs it should hold in cash.
- Find out what you pay now for personal life cover. If you have a policy, get the premium and the sum assured in front of you so the comparison is like for like.
- Get relevant life quotes through a broker or an insurer. Ask about the maximum multiple of remuneration, whether dividends count, the maximum term, the continuation option and its time limit, and whether the premium is guaranteed or reviewable.
- Put the policy into the insurer's trust at the outset and choose trustees. Ask whoever advises on your estate to look at the trust with your will.
- Tell your accountant. They will treat the premiums as a company expense and keep them off your P11D, and they will want the policy schedule for the file.
- If you already have a personal policy, do not cancel it until the relevant life policy is in force. Underwriting can take weeks.
The premium itself is the same product you would buy personally, priced on the same age and health. What changes is who pays it and how much of your profit that uses. For most directors it is one of the simpler decisions in the tax planning list, because the cover is something they already have or already want. The calculators show what each extra pound of profit is taxed at on the way out. That rate is where the saving comes from.
If you are weighing what else the company should pay for rather than you, what company cash is worth after tax as savings, a dividend or a pension contribution covers the bigger sums, and what Labour has changed for small business owners explains why the dividend route has become more expensive since April 2026.
Questions owners ask
-
Is relevant life insurance a benefit in kind?
It is not. An employer's cost of providing a death benefit for an employee is exempt from the benefit in kind charge under section 307 of the Income Tax (Earnings and Pensions) Act 2003, and a relevant life policy provides only that. The premiums do not go on a P11D and you pay no income tax or National Insurance on them.
-
Can a sole trader have relevant life insurance?
Not for themselves, because the person covered has to be an employee, and a sole trader is not an employee of their own business. The same applies to partners in an ordinary partnership and to members of an LLP. A sole trader with staff can set up relevant life policies for those employees.
-
Can a director paid mostly in dividends have relevant life cover?
Usually they can, as long as they are on the payroll as an employee as well as being a director. The main insurers count regular dividends from your own company as part of your remuneration when they set the maximum cover. A shareholder who takes no salary at all and is not on the payroll is likely to be refused.
-
Does the payout count towards my pension allowances?
It does not. A relevant life policy is not a registered pension scheme, so the lump sum does not count towards the lump sum and death benefit allowance of £1,073,100. That is one reason owners with large pension pots use relevant life cover in place of death in service through a pension scheme.
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Is the lump sum free of inheritance tax?
It normally is. The policy is written into a discretionary trust from the start, so the money is paid to the trustees rather than into your estate and they pass it to your family. The trust itself can have tax charges in some circumstances, so have the trust reviewed by whoever advises on your estate.
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What happens if I leave the company or close it down?
Most insurers include a continuation option. You can move the policy to a new employer or convert it into a personal policy, usually without new medical underwriting if you act within the insurer's time limit. If the premiums simply stop, the cover stops with them.
-
Can I add critical illness cover to a relevant life policy?
Critical illness cover cannot be added. The policy can only pay out on death, with terminal illness treated as an early payment of the death benefit. A policy that pays on other events falls outside the rules and loses the tax treatment. If you want critical illness cover, it has to be a separate policy.
Keep reading
Savings, dividend or pension, with the arithmetic for each.
Employer National Insurance, dividend tax and the rest in one place.
How many months of costs to hold and where to keep them.
Sources
- Income Tax (Earnings and Pensions) Act 2003, section 393B, relevant life policies
- HMRC Employment Income Manual EIM15045, relevant life policies
- HMRC Employment Income Manual EIM21800, employer provision for retirement or death benefits
- HMRC Insurance Policyholder Taxation Manual IPTM7030, permitted benefits and surrender value
- HMRC Insurance Policyholder Taxation Manual IPTM7035, who may benefit
- HMRC Insurance Policyholder Taxation Manual IPTM7040, the tax avoidance condition
- HMRC Business Income Manual BIM45525, insurance premiums on employees
- GOV.UK, tax on dividends 2026 to 2027
- GOV.UK, income tax rates and personal allowances 2026 to 2027
- GOV.UK, National Insurance rates and categories 2026 to 2027
- GOV.UK, corporation tax rates and marginal relief
- GOV.UK, lump sum allowance and lump sum and death benefit allowance
- Legal & General, Relevant Life Plan, cover limits and continuation cover
- Legal & General, relevant life insurance tax treatment and eligibility
- GOV.UK policy paper, inheritance tax on unused pension funds and death benefits from 6 April 2027
- Aviva, relevant life insurance continuation benefit, 90 day limit
This article is general information for UK business owners and is not tax, legal or financial advice. All rates, allowances and limits were correct at the time of writing, 15 October 2026, and apply to the 2026/27 tax year. They can change at any Budget. Premiums and cover limits are illustrative and differ between insurers. Speak to your accountant and a regulated adviser before acting.
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