Relevant Life Plan

A relevant life plan is a term assurance policy arranged by an employer on the life of an individual employee or director. Unlike a group life scheme, which requires a minimum number of members, a relevant life plan can be established for a single person, making it equally appropriate for a sole director of a small limited company and for a high-earning employee of a larger organisation. The company pays the premiums as an allowable business expense. The employee does not pay Income Tax or National Insurance on those premiums as a benefit in kind. The payout, when written in a discretionary trust, bypasses the employee's estate entirely and is received by the nominated beneficiaries free from Income Tax and, in most cases, Inheritance Tax. For directors who pay themselves through salary and dividends, a relevant life plan is often the most cost-efficient way to hold meaningful life cover available. At Vsure Financial, we advise on structuring relevant life plans correctly to ensure the tax advantages are fully realised.

The employer, typically the limited company, takes out a term assurance policy on the life of the employee or director. The policy is written in trust for the benefit of the employee's dependants or nominated beneficiaries from outset. This trust arrangement is essential: without it, the payout falls into the employee's estate and loses the key tax advantages. The company pays the monthly or annual premium as a legitimate business expense, reducing the company's taxable profit and therefore its Corporation Tax liability. The employee does not receive the premium payment as income and does not pay Income Tax or National Insurance contributions on it, unlike some other forms of employer-funded life cover which are treated as a benefit in kind. On the employee's death within the policy term, the lump sum is paid into the trust and distributed to the named beneficiaries. The process is typically faster than a probate-administered payment, and the funds are received free from Income Tax.

The financial case for a relevant life plan over a personally funded life insurance policy is compelling, particularly for higher-rate and additional-rate taxpayers. A personal life insurance policy is paid from post-tax income. A director earning £100,000 who needs £200 per month in life cover premiums must earn significantly more than that before tax to net the £200 required. A relevant life plan is paid by the company from pre-tax profits. The same £200 per month costs the company £200, reducing Corporation Tax by approximately £38 (at 19 per cent), meaning the net cost to the company is closer to £162. For a higher-rate taxpayer director, the combined effect of Corporation Tax relief on the company and the avoidance of Income Tax and NI on the benefit in kind means the effective cost of the same level of cover can be 40 to 50 per cent lower than the personal alternative. Over a 25-year term, this difference is substantial.

A relevant life plan can be arranged for any individual who is employed under a contract of employment, including company directors who hold employment contracts, even if they are also shareholders. It is not available to sole traders or partners in an unincorporated partnership who do not draw a salary. The policy can cover death only, or death combined with terminal illness (where a diagnosis confirms life expectancy is less than 12 months). Critical illness riders can sometimes be added, though this affects the tax treatment and must be structured carefully. The maximum sum insured is typically based on a multiple of the employee's remuneration package, and lenders will require evidence of salary and other employment benefits. The policy must genuinely be taken out for the purpose of providing a death-in-service benefit, as HMRC scrutinises arrangements that appear to be personal life insurance dressed as a relevant life plan.

Writing a relevant life plan in trust is not optional; it is the mechanism through which all of the tax advantages are realised and the payment is received by the right people at the right time. Without a trust, the payout falls into the employee's estate on death, potentially subject to Inheritance Tax on amounts above the nil-rate band, and requiring the grant of probate before funds can be released, a process that typically takes six to twelve months and can take considerably longer in contested estates. Written into a discretionary trust from day one, the policy proceeds bypass the estate entirely. The trustees, typically the remaining directors or a professional trustee, have discretion to distribute the funds among the nominated beneficiaries in the most appropriate way, taking into account circumstances at the time of the claim. Your Vsure adviser will ensure the trust is established correctly and that the trust documentation is completed at the point the policy is taken out.