As a business owner or company director, you are constantly looking for ways to make your capital work harder. You scrutinise every business expense, looking for efficiencies that can lower your tax bill while protecting your future.
Yet, when it comes to life insurance, many directors are still stuck in the “old way” of doing things. They take out a standard personal life insurance policy, pay for it from their own bank account, and assume that is their only option.
If you run a Limited Company, this could be a costly mistake.
There is a smarter, more tax efficient alternative known as a Relevant Life Plan. But is it right for everyone? And how does it stack up against traditional personal life cover?
At Pineapple Insurance Services, we believe you shouldn’t pay a penny more in tax than necessary. In this guide, we’re putting these two heavyweights head-to-head to help you decide how to protect your family and your business.
What is Death in Service Benefit?
Death in service cover is a workplace benefit. If you die while employed by the company, your employer may pay a tax free lump sum to your nominated beneficiaries. This is known as a death in service payment, and it’s often linked to your company pension scheme. It’s typically calculated as two to four times your annual salary, but the exact amount depends on your employer.
These payments are usually made via a discretionary trust, which helps avoid inheritance tax and speeds up the payment process.
Life insurance cover is a personal policy you take out yourself. It pays a life insurance payout to your chosen beneficiaries if you pass away during the policy term. You choose the amount, the length of cover, and who receives the money.
Unlike death in service, your cover isn’t tied to your job. It continues regardless of who you work for, offering long-term protection that stays with you.
To understand the savings, you first need to understand the structure.
Personal Life Insurance is a private arrangement. You apply for it as an individual, and you pay the premiums from your net income (salary or dividends that have already been taxed). It has nothing to do with your business.
A Relevant Life Plan is a form of business protection. It is a “death in service” policy for a single employee (or director). Your company applies for the policy and is responsible for paying the premiums. However, the payout (the lump sum) goes directly to your family, not the business.
Comparison
| Who provides the benefit? | Death In Service | Life insurance |
|---|---|---|
|
Who provides the benefit? |
You, through an insurance provider |
Your Employer |
|
Payout Amount |
Typically 1-4 times your salary |
Flexible, based on your needs & policy choice |
|
Medical Exam |
No Medical Exam required |
May require, depending on policy |
|
Cost |
Low cost or free (employer paid) |
Premiums based on health, age and coverage level |
This is where the Relevant Life Plan lands its knockout blow.
When you pay for personal life insurance, you are using “dear money.”
• First, your company pays Corporation Tax on its profits.
• Then, you withdraw that money as salary or dividends, paying Income Tax and National Insurance.
• Then you pay your insurance premium.
With Relevant Life insurance, the premiums are usually treated as an allowable business expense by HMRC. This means:
1. Corporation Tax Relief: Your company can offset the cost against its profits.
2. No National Insurance: You don’t pay Employer or Employee NI on the premiums.
3. No Benefit in Kind: Unlike a company car, a Relevant Life Plan is generally not treated as a taxable benefit in kind. You don’t need to declare it on your P11D.
The Result: For a higher-rate taxpayer, paying for relevant life cover through the business can be up to 49% cheaper than paying for personal life cover personally.
Round 2: Eligibility (The Sole Trader Trap)
Before you rush to cancel your personal direct debit, you need to check if you qualify. Relevant Life insurance is strictly for employees and directors of UK Limited Companies.
If you are a sole trader or a partner in a partnership, you cannot take out a Relevant Life policy on yourself. HMRC views you and the business as the same legal entity, so the tax breaks don’t apply. As a sole trader, you must stick with personal life insurance.
However, if you employ staff, you can set up a Relevant Life policy for them to provide death in service benefits as a perk, even if you can’t have one yourself.
Both policies aim to do the same thing: pay a cash lump sum to your loved ones if you die. But the mechanics differ.
A Relevant Life Plan must be written in trust from day one. Specifically, it goes into a discretionary trust.
• This keeps the payout out of your estate, helping you avoid 40% Inheritance Tax.
• It ensures the money is paid quickly to your beneficiaries, bypassing probate.
With personal life insurance, the policy is not automatically written in trust. If you forget to set one up (which many people do), the payout is added to your estate. This could push your family over the Inheritance Tax threshold, meaning the government takes a huge slice of their protection money.
Relevant Life vs. Group Schemes
If you have a larger team, you might be familiar with a group scheme (also called group life insurance). This is the traditional way to provide death in service benefits to 20+ employees at once.
So, why would you choose a Relevant Life Plan over a group scheme?
1. Specificity: A group scheme is often a blunt instrument (e.g., “everyone gets 4x salary”). Relevant Life allows you to tailor high-value cover (e.g., 20x salary) specifically for high-earning directors.
2. Portability: If you leave the group life scheme, the cover stops. With Relevant Life, because it is an individual policy, you can often take it with you or convert it to a personal policy if you sell the business.
3. Simplicity: Group schemes can be complex to administer. Relevant Life is perfect for single-director companies or small teams where a full group plan is overkill.
The "Critical" Limitation
There is one area where personal life insurance often wins: adding extra bells and whistles.
Many people like to combine their life cover with Critical Illness cover (which pays out if you get cancer, have a heart attack, etc.).
• Personal Life Insurance: You can easily add Critical Illness to your plan.
• Relevant Life Plan: You generally cannot add Critical Illness cover. If you do, the policy may lose its tax-advantaged status, and you could be hit with a benefit in kind tax bill.
However, most Relevant Life insurance policies do include Terminal Illness cover. This means if you are diagnosed with less than 12 months to live, the policy will pay out early.
If you need full Critical Illness protection, the best strategy is often a “hybrid” approach: use a Relevant Life Plan for the life cover (to save tax) and a smaller personal policy for the illness cover.
Summary: Which One Wins?
Choose a Relevant Life Plan if:
• You are a Director of a Limited Company.
• You want to reduce your Corporation Tax bill.
• You are a high earner who wants to avoid the benefit in kind trap.
• You want the efficiency of paying the premiums from pre-tax business revenue.
Choose Personal Life Insurance if:
• You are a sole trader or partner.
• You want to combine Life and Critical Illness in one simple policy.
• You are no longer working but still need protection.
What If the Key Person Suffers a Critical Illness?
Conclusion
The difference between relevant life plan vs personal life insurance isn’t just jargon; it’s a mathematical calculation that could save your business thousands of pounds.
Why pay for protection with taxed income when the government allows you to treat it as a tax-deductible business expense?
At Pineapple Insurance Services, we specialise in setting up these robust business protection plans. We handle the discretionary trust paperwork, ensure you are compliant with HMRC rules, and find the most competitive premiums on the market.
Stop paying more than you have to Speak to our team today to switch your cover to a tax-efficient Relevant Life Plan.
