Why Taking Out a Life Insurance Policy via Your Limited Company Can Be Tax Efficient
If you run your own limited company, you probably already think carefully about how to structure your income in the most tax-efficient way. You might split your earnings between salary and dividends, claim allowable expenses, and make use of your pension allowances. But one area many directors overlook is life insurance.
Paying for a policy personally, out of your net income, can be surprisingly expensive – especially once higher-rate tax is factored in. But there’s a little-known alternative: relevant life insurance. It allows your business to fund the premiums directly – and the tax savings can be significant.
A smarter way to provide life cover
Rather than taking out a personal life policy, many directors are now opting for a company-funded solution.
A relevant life policy is a form of life insurance arranged and paid for by your limited company. It’s designed to provide financial protection for your family if the worst happens, but crucially, the cover is set up in your name, not the company’s. If you were to die while working for your business, the policy would pay out a lump sum to your chosen beneficiaries – typically via a discretionary trust.
Although the structure is different to traditional life insurance, the outcome is similar: peace of mind that your loved ones are financially protected.
The tax advantages
What makes relevant life insurance stand out is its tax treatment – for both the company and the individual.
- Corporation tax relief – The premiums are usually treated as an allowable business expense, reducing your company’s tax bill.
- No benefit-in-kind charge – You won’t be taxed personally on the premiums, unlike some other employer-provided benefits.
- Tax-free payout – The lump sum is paid tax-free to your family, provided the policy is written into trust correctly and HMRC rules are followed.
Taken together, these benefits mean relevant life cover can cost far less than personal cover for higher earners – often saving up to 50% in real terms.
Who is it suitable for?
Relevant life insurance is typically used by:
- Company directors who want personal life cover paid for through their business.
- One-person companies and contractors who don’t have access to group life schemes.
- Small businesses who want to offer death-in-service benefits to employees without the cost and complexity of a group policy.
There are limits – it doesn’t cover critical illness or income protection – and it’s only available while you’re employed by the company. But for simple, tax-efficient life cover, it’s hard to beat.
Setting up a policy
The process is straightforward. You choose the level of cover, arrange the policy through a provider or adviser, and your company pays the premiums directly. The policy should be written into trust from the outset – this is essential to keep the payout outside your estate and avoid inheritance tax.
Most mainstream insurers offer relevant life products, and many financial advisers now specialise in this area.
Want to learn more?
To see how the numbers work and whether it’s right for your business, this relevant life insurance guide for limited company directors explains the key features and includes tax examples.
If you’re a contractor, you may find this relevant life guide for contractors particularly useful, as it covers how to integrate life cover into your broader financial planning.
