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Relevant Life Policies

A relevant life policy is an employer funded life assurance policy written on the life of an employee and which, provided it meets certain legislative requirements, benefits from favourable tax treatment.


The employer can be a limited company, a limited liability partnership, a partnership, a sole trader (as a business with employees) or a charity. Directors of limited companies are generally employees. However, equity partners, members and sole traders (in their personal capacity as business owners) aren’t employees, so they wouldn’t qualify for this type of cover.

In what circumstances might a relevant life policy be suitable?

A relevant life policy could be suitable in the following circumstances:-

  • Where a small business doesn’t have enough employees to qualify for a group life scheme, or
  • Where employees have substantial pension funds and they don’t want the death in service benefits to form part of their pensions lifetime allowance. The premiums paid for the relevant life policy won’t impact the employee’s annual allowance either, or
  • Where the employer wants to provide death in service benefits, which exceed the amounts provided by the main company scheme.

What are the tax benefits of a relevant life policy?

A relevant life policy attracts beneficial tax treatment when compared to an ordinary life policy, which the employer funds on behalf of an employee.

For the Employee

  • Exemption from the benefit in kind charge.
  • Under S307 ITEPA, where an employer provides an employee with a retirement or death benefit, even where this is not under a pension scheme, the provision of this benefit is exempt from income tax. In other words, the premiums on a relevant life policy won’t be a benefit in kind, as the policy will be providing retirement (by way of terminal illness cover) or death benefits.
  • Also, the payments of the premiums won’t be subject to Class 1 National Insurance Contributions, where this income tax exemption is satisfied.
  • Tax on benefits -  Part 7A ITEPA doesn’t apply to an arrangement whereby an employer is providing an employee with a relevant life policy, as defined above. In other words, the disguised remuneration rules won’t apply, meaning that there won’t be an income tax or national insurance liability when benefits are paid out on a death or terminal illness claim.

For the Employer

  • The employer should be able to claim tax relief in relation to the premiums paid, so long as the premiums meet the ‘wholly and exclusively for the purposes of the business’ test. A shareholder/director of a close company should take tax advice, if they want to take out a large amount of cover on their own life, as the premiums may not qualify for tax relief.
  • There will be no employer’s National Insurance Contributions due in relation to the premiums paid.
  • Also, there will be no income tax, corporation tax or capital gains tax implications for the employer when the policy pays out, where the policy is held in an appropriate Trust.

The business tax adviser should be able to provide confirmation on the tax treatment of the policy for both the business and the employee. If not, then they may be able to seek clarification from HM Revenue & Customs (HMRC).

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