Relevant Life Cover And Your Lump Sum Allowance

Relevant life insurance for directors has a tax treatment that is genuinely different from an ordinary personal policy and from a registered group life scheme, and the differences are the whole reason it exists. Put simply: the company pays the premiums, those premiums are not normally treated as a taxable benefit in kind for the director, they are usually deductible against corporation tax, and the payout — written in trust for the director's family — normally arrives free of income tax and outside the estate for inheritance tax.

There is one more feature that matters most to directors with sizeable pensions, and it is the point this page is really about. A relevant life policy is not a registered pension scheme, so its payout is not tested against the lump sum and death benefit allowance in the way a registered group life benefit is. For a director who has already built a large pension pot, that can be the deciding factor.

None of this is automatic, though, and that is where honesty matters more than the sales brochure. Every one of these tax advantages depends on the policy meeting a precise set of conditions and being written in trust correctly. Get the structure wrong and the benefits fall away one by one. This page walks through the mechanics as they actually work, rather than as a marketing leaflet presents them.

The short answer: what relevant life cover is

A relevant life policy is a form of death-in-service cover written on a single life. The company takes out the policy on the director as an employee, pays the premiums, and the cover is placed in trust so that on death the sum is paid to the director's family or chosen dependants rather than to the business. In shape it is close to the group life scheme a large employer might run, but built for one person, which is why it suits directors and small companies where a group scheme would not be practical.

A director counts as an employee, or office-holder, of their own company, so they can be covered by one of these policies in the same way any employee can. That employment relationship is essential — it is what allows the company to pay the premiums as part of the remuneration package and underpins the whole tax treatment. This is cover the business provides for the director, not cover the director buys personally, and the distinction runs through everything that follows.

Is it a benefit in kind for the director?

Ordinarily, if a company pays for something personal for a director — a car, private medical cover — the value is taxed on the director as a benefit in kind, reported on a P11D. Relevant life cover is treated differently. Where the policy meets the relevant life policy conditions set out in the tax legislation, the premiums the company pays are not normally treated as a taxable benefit in kind for the director.

That is a real advantage over paying for the same protection out of taxed personal income, and it is one of the main reasons the arrangement is used. But notice the condition buried in that sentence: the treatment applies where the policy meets the relevant life policy conditions. Those conditions are specific, and a policy that strays outside them — by including a surrender value, say, or by running beyond the permitted age — can lose this treatment. Meeting the definition is not a formality; it is the thing that delivers the tax result.

Can the company deduct the premiums?

The corporation tax position is often oversold, so it is worth being careful. Premiums are generally allowable as a deduction against corporation tax where the cover is genuinely part of the employee's remuneration package and satisfies the "wholly and exclusively for the purposes of the trade" test. For a working director on a normal package, that is usually met.

What it is not is automatic. The deduction is ultimately a matter for HMRC on the facts of each case, and there are situations — a controlling director where the cover looks less like remuneration and more like a personal benefit routed through the company — where an inspector could take a different view. This is exactly the trap we describe in why corporation tax relief on premiums is not automatic. The sensible course is to treat the deduction as very likely rather than certain, and to ask your accountant to confirm it for your specific circumstances rather than relying on a provider's brochure, which cannot know your facts.

The payout: trust, income tax and inheritance tax

The reason a relevant life policy is written in trust from the outset is that the trust is what delivers the two advantages families care about most. Because the sum is paid into a discretionary trust for the family rather than to the director's estate, it normally arrives free of income tax, and because it never becomes part of the estate, it normally falls outside inheritance tax as well. The trustees then pay it out to the beneficiaries.

Both of those results depend on the trust actually being in place and set up properly. A relevant life policy that is not written in trust loses the point of the exercise: the payout can fall into the estate, exposing it to inheritance tax and to the deceased's creditors, and the neat separation from the business breaks down. We spell out that failure mode in the relevant life catch when there is no trust. Treat the trust not as paperwork to be done later but as part of the policy itself.

Relevant life cover is usually written to pay a lump sum, but it does not have to be — it can be arranged to pay a regular income to the family instead, in the shape of family income benefit. Which one suits depends on whether the people left behind need a capital sum or a monthly replacement for a lost income, a choice we weigh up in lump sum or monthly income when a parent dies young. As always, no policy pays out until the insurer has assessed the claim against the terms, and cover in the first place is subject to underwriting.

Why it sits outside the lump sum and death benefit allowance

This is the technical point that draws directors to relevant life cover, and it turns on a single fact: a relevant life policy is not a registered pension scheme. When the lifetime allowance was replaced, the system that took its place includes a lump sum and death benefit allowance, which limits how much can be paid out tax-free in lump sums, including certain lump sum death benefits from registered pension schemes. A registered group life scheme's death benefit is tested against that allowance.

Because a relevant life policy is not a registered pension scheme, its payout is not tested against the lump sum and death benefit allowance in that way. For a director who has already accumulated a substantial pension, that matters a great deal. A large registered group life payout on top of a large pension could run into the allowance and expose part of the benefit to tax on the recipient; the same cover written as a relevant life policy generally does not, because it is measured against a different set of rules entirely.

This interacts with wider pension planning, especially with the changes to how unused pension funds are treated for inheritance tax from April 2027. A director juggling a big pot, an allowance and a future tax change has several moving parts to line up, and it is worth reading how the pension side is shifting in whether to spend a pension before the April 2027 change alongside anything you decide about relevant life cover. The two questions are related, and looking at either in isolation can lead to the wrong call.

The conditions you have to meet precisely

Everything above rests on the policy qualifying as a relevant life policy, so it is worth being concrete about what that generally requires. The cover must be a single life policy providing a lump sum, or an income, payable on death, and commonly on terminal illness, before a set age — the cover is not designed to run into later old age. It must have no surrender value and no investment element; it is pure protection, not a savings product. It must be written in trust for individuals — the family or dependants — or for a charity. And it must not have tax avoidance as a main purpose.

Miss one of these and the policy may not be a relevant life policy at all, which unravels the benefit-in-kind treatment and the clean payout. This is why a relevant life policy is not something to improvise: the arrangement is a package of the right policy plus the right trust, and it works only when both are correct. An FCA-authorised broker who arranges these regularly will set both up together rather than leaving the trust as an afterthought.

It is also worth keeping relevant life cover separate in your mind from business protection, which solves a different problem. Cover that protects the ownership of the company on a shareholder's death — so that shares and control end up in the right hands — is a distinct arrangement with its own structure and tax questions, and mixing the two up causes real trouble, as in what happens when a shareholder's stake and the company's premises pass to a widow. Relevant life cover looks after the director's family. Shareholder protection looks after the business. You may want both, but they are not interchangeable.

How to approach it, and getting the facts checked

The honest summary is that relevant life cover can be an efficient way for a company to provide death-in-service protection for a director, but only when it is set up precisely and when the tax treatment has been confirmed for the actual circumstances rather than assumed from a leaflet. The benefit-in-kind position, the corporation tax deduction and the inheritance tax result each depend on details that a general article cannot verify for you.

So the practical path is straightforward. Have your accountant confirm the corporation tax and benefit-in-kind position for your company and your package. Make sure the policy is a genuine relevant life policy and that the trust is completed at outset. If you want to see what the cover itself would look like, you can get life insurance quotes and have an FCA-authorised broker price and structure it, including the trust, rather than buying a bare policy and trying to bolt the trust on afterwards. For the wider picture of who a scheme or policy pays and how death benefits fit together, our guide to pensions, nominations and death benefits sets out the surrounding rules.

Scotland and Northern Ireland

The tax rules that make relevant life cover work — the benefit-in-kind treatment, the corporation tax deduction, inheritance tax and the lump sum and death benefit allowance — are UK-wide, so the treatment itself is the same wherever the company and the director are based.

The one wrinkle is that income tax rates and bands differ for Scottish taxpayers, which affects the comparison between paying for cover through the company and paying for it out of personal income, since the personal income route is taxed at Scottish rates for a Scottish taxpayer. That changes the size of the advantage, not the structure of it. The relevant life policy conditions, the trust requirement and the allowance point apply identically across all four nations, so the way the arrangement is built does not change north of the border or across the Irish Sea.

Frequently asked questions

Is relevant life cover a benefit in kind for the director?

Where a policy meets the relevant life policy conditions in the tax legislation, the premiums are not normally treated as a taxable benefit in kind for the employee, and the cover is written on a single life in trust for family or dependants. The conditions must be met precisely, because a policy that falls outside the definition — for example by carrying a surrender value — can lose that treatment, so the structure matters as much as the intention.

Can the company claim the premiums against corporation tax?

Premiums are generally allowable where the cover is genuinely part of the employee's remuneration package and meets the wholly and exclusively test. It is a matter for HMRC on the facts of each case rather than an automatic entitlement, so ask your accountant to confirm it for your circumstances rather than relying on a provider's marketing brochure, particularly where a controlling director is involved and the cover could be seen as a personal benefit.

Does a relevant life payout use up my lump sum and death benefit allowance?

A relevant life policy is not a registered pension scheme, so the payout is not normally tested against the lump sum and death benefit allowance in the way a registered group life benefit is. That is one reason directors with large pension pots look at this route, because it lets them provide death-in-service cover without eating into an allowance their pension may already be pressing against.