If you’re a UK small business owner paying for life insurance out of your own pocket, you might be wasting thousands in unnecessary tax. There’s a little-known type of cover (the Relevant Life Policy or RLP) that can cut your costs by over 50%, while keeping you fully protected.
The key problem with standard life insurance policies paid for by a company is that it gives rise to a taxable benefit in kind on the individual. Benefits in kind (personal things paid for by an individual’s employer or company) give rise to a 15% Class 1 national insurance (NI) charge for the company – and are then taxed again on the individual at either 20% or 40%, depending on whether the individual is a basic or higher-rate taxpayer (or even 45% if the y pay income tax at the ‘additional rate’!)
Example 1
B Ltd pays £800 in premiums in 2025/26 for a life insurance policy in respect of Bernie – a higher rate taxpayer and director/owner of the company. As a result, B Ltd will be liable to Class 1A NI of 15% x £800 = £120. Admittedly, B Ltd will be able to claim corporation tax relief on the premiums and NI paid, so, assuming it pays a 25% rate of corporation tax, B Ltd will get 25% x (£800 + £120) = £230 off its corporation tax bill. Note that a small company with taxable profits of no more than £50,000 per annum will only pay corporation tax at 19%. You might want to re-work these numbers using a 19% rate if that applies to you. However, the net benefit at 19% will still be hugely substantial!
As the £800 paid by B Ltd is treated as a benefit in kind for Bernie, he will be liable to income tax of £800 x 40% = £320.
So, the company pays £120 in NI, saves £230 in corporation tax and Bernie pays £320 income tax. Bernie and his company combined have suffered a net tax/NI cost of £210.
But there is another way. One means of providing life cover without the adverse tax consequences would be for B Ltd to look at paying for a ‘relevant life policy’ (RLP) instead. RLP premiums do not give rise to a benefit in kind. This is because they are specifically exempted.
Limited company directors and employees can take advantage of RLPs. The policy must be in the name of the limited company (you can’t just switch the Direct Debit for an existing policy over to your company, for example). Group policies aren’t RLPs. If you wanted to use relevant life cover for more than one person in your business, you’d need separate policies for each. Upon death, the payout would go to the director’s or employee’s family or beneficiaries via a discretionary trust and is usually free of inheritance tax if structured properly. There are maximum cover limits, often around 25 times remuneration.
Example 2
B Ltd takes out an RLP for Bernie instead of a standard insurance policy. Assuming the annual premiums total £800 (as above), it receives corporation tax relief of 25% x £800 = £200. There is no Class 1A NI charge (as there is no benefit in kind involved here), and Bernie does not need to pay any income tax (again, because there is no benefit in kind). Bernie and his company are now £200 better off. Compare this with being £250 worse off and you’ll see that the improvement in the combined positions of Bernie and B Ltd is a whopping £200 + £210 = £410 – that’s 51% of the value of the premiums!
An RLP is a ‘term assurance plan’. In other words, it runs for a set period which is agreed when the plan is first taken out. RLPs are available to companies to provide an individual death in service benefit for an employee or director. They are designed to pay a lump sum if the employee dies whilst employed during the length of the policy. They will also pay out if the employee, whilst employed, is diagnosed with a terminal illness.
Switching to an RLP could save you thousands this tax year. EBA can review your current cover and give you a tax-saving recommendation within 48 hours – before your next premium is due.