East Sussex Directors: Act Before 6 April 2027 on Relevant Life Policy

For most directors who are employees of their limited company, a relevant life policy is the tax-efficient way for an employer to provide term life cover. Premiums are usually deductible for the company, and the death benefit is normally paid outside the director’s estate when the policy is correctly arranged. Sole traders and anyone without an employer payroll relationship cannot use this route, so checking your business structure comes first.

TL;DR:

• Relevant life policies are only available to PAYE-employed directors and employees of small companies, excluding sole traders and partners unless employed separately.
• Premiums are generally deductible for the company if the policy is correctly structured, and the death benefit usually pays into a trust outside the estate, avoiding inheritance tax.
• Accurate payroll evidence and correct policyholder designation are crucial, as mistakes can lead to tax charges or claim delays.
• Policy documentation must confirm the scheme’s status to ensure inheritance tax exclusion and proper reporting from April 2027.
• When set up properly, relevant life policies provide a cost-effective, tax-efficient way to secure family protection and key person cover through a discretionary trust.

Table of Contents

• What is a relevant life policy and who qualifies
• Tax and payroll: how premiums, benefits and reporting work
• How pension and inheritance tax reforms affect death-in-service benefits
• Step-by-step: setting up cover correctly from the start
• Advantages, limitations and pitfalls to weigh up
• Alternatives when a relevant life policy is not the right fit
• Independent advice for directors across East Sussex
• Arrange independent protection advice with an independent mortgage and protection adviser
• Sources
• FAQ

What is a relevant life policy and who qualifies

A relevant life policy is a single-life, employer-purchased term assurance plan. The company takes it out on the life of a named employee or director, pays the premiums, and the policy pays a lump sum to that person’s family if they die during the term. It sits outside pension arrangements and outside most auto-enrolment considerations, which makes it a popular choice for owner-managed businesses that want death-in-service style cover without setting up a group scheme.

Eligibility depends entirely on employment status, not on job title or business size. You typically qualify if you are:

• A director drawing salary through PAYE from your own limited company
• An employee of a small company, including one with only a handful of staff on payroll
• A contractor operating through a personal service company, provided you are paid as an employee of that company

Sole traders do not qualify because there is no employer and employee relationship for the insurer to underwrite the policy against. The same applies to partners in a traditional partnership, unless the partnership itself employs them under a separate contract.

We see three common uses among director clients. The most frequent is straightforward family protection: a director wants their spouse or children to receive a lump sum if they die, structured so the company pays and the family is not taxed on the premiums. The second is key-person style thinking, where a smaller business wants to soften the financial shock of losing a working director, even though a relevant life policy pays the family rather than the business directly. The third is coordinating cover with mortgage borrowing, since lenders often expect life cover on a director’s income when a mortgage is assessed on that salary.

A common misconception is that any business owner can simply set one up. Underwriters will ask for payroll evidence and confirmation of employment status, and a policy written incorrectly for someone who is not genuinely an employee can be turned down, or worse, unwound after a claim.

Tax and payroll: how premiums, benefits and reporting work

The tax treatment is the main reason directors choose this route over a personal policy, but it depends on getting the structure right from day one.

Premiums paid by the employer are generally allowable as a business expense, provided HM Revenue and Customs would view them as a reasonable cost of remuneration rather than an attempt to extract value from the company in a tax-favoured way. HMRC’s Employment Income Manual sets out the distinction between relevant life policies and other employer-funded arrangements such as EFRBS, and this is the reference point most accountants use when confirming a policy qualifies.

• Employer premiums are usually deductible against corporation tax when the policy is correctly written as a relevant life plan
• The premiums are not normally treated as a benefit in kind for the director, so there is no income tax charge on the employee
• The death benefit is typically paid to a discretionary trust rather than directly to the estate, which keeps it outside the value of the director’s estate in most qualifying circumstances
• National Insurance is not usually due on the premiums when the policy meets the relevant life conditions

One area to check closely: reporting method is changing. Practitioner guidance from the Association of Taxation Technicians notes that some employer benefit reporting is moving from the P11D form to payroll reporting from April 2027, and employers should confirm with HMRC guidance which route applies to their situation before that date.

Mistakes tend to cluster around three points. The first is naming the wrong policyholder: the company must be the policyholder, not the director personally, or the tax advantages disappear. The second is treating what is actually a personal policy as though it were employer-funded, without running the premiums through payroll correctly, which can create an unexpected benefit-in-kind charge. The third is assuming the tax treatment is automatic regardless of how the policy is worded. The ATT guidance is clear that the correct treatment depends on the policyholder and the benefit structure, not on the intention behind setting it up.

For owner-managed companies specifically, the guidance also flags that premiums might be questioned as part of overall remuneration if they look disproportionate to the director’s role or salary. This rarely causes problems for a policy sized sensibly against income, but it is worth discussing with your accountant before the application goes in, particularly if you are also drawing dividends alongside a modest salary.

How pension and inheritance tax reforms affect death-in-service benefits

Directors setting up cover now should understand how the wider reform of inheritance tax on pensions touches death-in-service benefits, because the two are often confused.

The government has confirmed that death-in-service benefits payable from a registered scheme or arrangement will remain excluded from Inheritance Tax, even as most unused pension funds and pension death benefits are brought within the value of a person’s estate from 6 April 2027. This matters directly for relevant life policies, because the exclusion for death-in-service style payments is what keeps the lump sum outside the estate for inheritance tax purposes.

Death-in-service benefits payable from a registered scheme or arrangement will remain excluded from Inheritance Tax.

The practical consequence is that documentation now carries more weight than it used to. A technical note on inheritance tax and pensions advises personal representatives to identify the relevant scheme or arrangement and contact the administrator directly when a death benefit is being claimed, rather than assuming the payment automatically falls outside the estate.

For directors and employers, that means a few things are worth doing now, well before any claim is ever needed:

• Keep a clear paper trail showing the policy was arranged and paid for by the company, not the individual
• Record the trust arrangement in writing, including who the trustees are and how beneficiaries are nominated
• Tell family members or nominated beneficiaries that the policy exists and roughly how a claim would work
• Review the policy documentation periodically, especially after any change in company structure or directorship

Personal representatives dealing with an estate after a director’s death will need to show HMRC that a payment genuinely falls within the death-in-service exclusion. Good records at the outset save weeks of delay later, and they are far easier to gather while everyone involved is still around to confirm the details.

Step-by-step: setting up cover correctly from the start

Getting the structure right at application stage avoids almost every problem that surfaces later, whether that is a tax query or a delayed claim.

1. Confirm the policyholder. The company is the policyholder and the payer of premiums; the director is the life assured, not the applicant.
2. Decide the beneficiary route. Most relevant life policies are written into a discretionary trust so the payout can reach the intended family members quickly and stays outside the estate.
3. Choose trustees. Trustees are usually the director, a fellow director, or a professional trustee where the arrangement is more complex; their role is to distribute the payout according to the letter of wishes.
4. Gather payroll evidence. Insurers want to see that the life assured is genuinely employed, so payslips, a director’s service contract, or RTI submissions are typically requested.
5. Complete medical underwriting. This follows the same process as most term life applications, and can involve a phone interview or a request for GP records depending on age and health history.
6. Review and sign the trust deed. This is usually provided by the insurer and should be checked against the intended beneficiaries before signing.

Pro Tip: Get your payroll and employment paperwork together before you apply, not after the insurer asks for it. Missing evidence is the single biggest cause of delay we see in these applications.

Timescales vary with age, health and how quickly paperwork is returned, but straightforward cases can complete within a few weeks. Where the main hold-up occurs, it is nearly always the trust deed sitting unsigned or a medical report waiting on a GP practice, both of which you can chase proactively rather than waiting on the insurer.

Advantages, limitations and pitfalls to weigh up

The tax efficiency is real, but it comes with structural requirements that are worth weighing before you commit to this route over a personal policy.

Advantages worth knowing:

• Premiums are usually deductible for the company as a business expense
• The death benefit typically sits outside the director’s estate when paid via trust
• No employee benefit-in-kind charge arises when the policy is correctly structured
• It tends to be more cost-effective for small companies than setting up a full group scheme

Limitations to bear in mind:

• Sole traders and unincorporated partnerships cannot use this structure at all
• Underwriting still applies in full, so pre-existing health conditions affect price and availability exactly as they would for a personal policy
• A discretionary trust adds a layer of administration that some directors find unfamiliar

The pitfalls we see most often are avoidable with a bit of care. Incorrect policyholder details on the application are the most frequent, followed by directors assuming National Insurance treatment is automatic regardless of how premiums are processed through payroll. Weak beneficiary nomination, where the letter of wishes is vague or never updated after a change in family circumstances, causes unnecessary delay at claim stage. It is also worth checking how the policy interacts with any pension death benefits or other employer-provided cover, so the director’s family is not left with an unexpectedly complicated claim across several products.

Pro Tip: If your company already offers a group life scheme, check whether a relevant life policy duplicates or complements it before applying, rather than after.

Where the numbers or the structure get complicated, particularly for directors with mixed salary and dividend income, a conversation with an accountant or tax specialist alongside your protection adviser is worth the time.

Alternatives when a relevant life policy is not the right fit

Not every director or business owner will qualify, and some will simply prefer a different structure. Three routes cover most cases.

• Personal term life insurance: the individual is both policyholder and life assured, and premiums come from personal income rather than company funds. If an employer pays these premiums instead, the payment is normally treated as a benefit in kind and needs reporting through P11D or payroll, which removes the tax advantage a relevant life policy offers.
• Family income benefit: rather than a single lump sum, this pays a regular income to the family for a set term, which can suit households more focused on replacing monthly income than settling a mortgage in one go. Our comparison of family income benefit and lump-sum cover sets out how beneficiaries typically choose between the two.
• Key-person insurance: purchased by the business itself, with the payout going to the company rather than the family, this is designed to protect the business against the financial impact of losing a critical director or employee, not to provide personal family protection.

Contractors working through a limited company, but paid unevenly or through less conventional structures, sometimes find that eligibility for a relevant life policy is less straightforward than it first appears. Our guide on using day rate evidence for contractor mortgages explains why documentation matters just as much for protection products as it does for borrowing. Where your circumstances sit outside the standard picture, speaking to a mortgage and protection adviser before applying saves time and avoids an unsuitable quote.

Independent advice for directors across East Sussex

We work with company directors and contractors in the East Sussex area, and the questions around relevant life policies come up regularly, particularly from clients arranging a mortgage alongside their protection needs. Our advisers check payroll evidence, director status and company structure before recommending a relevant life policy over a personal alternative, and coordinate with accountants where trust arrangements or unusual remuneration need a second opinion.

Contractors and CIS subcontractors often present the trickiest cases, since payment patterns can look irregular even when income is genuinely stable. Advisers work through that evidence and present it in a way insurers and lenders both accept. Where a case needs specialist tax or legal input beyond advisory scope, clients are referred on rather than guessed.

— Paul

Arrange independent protection advice with an independent mortgage and protection adviser

If you are a director in Hastings, Eastbourne, Hailsham, Bexhill-on-Sea or anywhere across East Sussex and want to check whether a relevant life policy suits your circumstances, you can get advice alongside your wider mortgage and protection planning. Advisers may work across the whole market rather than a single insurer’s product range, which means recommendations can be based on your situation rather than a limited panel.

• Independent, whole-of-market protection advice covering relevant life policies and personal alternatives
• Help gathering payroll and employment evidence insurers typically require for a smooth application
• Referral support for trust arrangements where a specialist opinion is useful
• Advice that considers your mortgage alongside your protection needs, including options like debt consolidation mortgages and CIS voucher mortgages for enhanced income for self-employed contractors

Visit our independent mortgage and protection advice page to book a conversation, or get in touch to request written confirmation of how a relevant life policy could work for your company.

This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.

Sources

• Back to basics: Life insurance policies | The Association of Taxation Technicians
• HMRC Employment Income Manual: EIM15045

FAQ

What is a relevant life policy for directors?

A relevant life policy is a single-life term assurance plan that a limited company takes out and pays for on behalf of a director or employee. It typically gives the director’s family a tax-efficient lump sum on death, with premiums usually deductible for the company and no benefit-in-kind charge for the employee when the policy is set up correctly.

What are the top providers of relevant life policies in the UK?

Several major UK insurers offer relevant life policies, and the right choice depends on underwriting appetite, trust documentation and how the provider handles director or contractor income. Rather than naming a single “best” provider, an independent adviser such as Prosper Home Loans can compare whole-of-market options against your specific circumstances.

Is a relevant life policy worth it for a company director?

For most directors on PAYE, a relevant life policy is worth considering because premiums are usually deductible for the company and the payout is normally kept outside the director’s estate. It is not available to sole traders, so checking your business structure and getting a professional recommendation before applying is the sensible first step.

Can contractors use a relevant life policy?

Contractors operating through a personal service company can often qualify, provided they are paid as an employee of that company through payroll. Contractors paid irregularly or largely through dividends should get their structure checked before applying, since insurers will ask for payroll evidence to confirm employment status.

What happens to a relevant life policy payout when someone dies?

The payout is normally directed to a discretionary trust set up alongside the policy, with trustees distributing it to the beneficiaries named in the letter of wishes. Because death-in-service benefits from a registered scheme or arrangement remain excluded from Inheritance Tax, the payment is typically kept outside the value of the director’s estate.