Is Life Assurance Tax Deductible

Life assurance offers financial security to families and businesses in the event of death, but whether the premiums are tax deductible depends on the structure of the policy and who is paying for it. In the UK, most life assurance policies are considered personal protection and are not tax deductible. However, there are exceptions for certain business-related policies, including relevant life policies and key person cover.

The rules vary depending on whether you are a sole trader, company director or employer, and whether the policy is intended to benefit the business or the individual. This article explains how life assurance is treated for tax purposes and when you may or may not be entitled to claim tax relief on premiums.

What Is Life Assurance?

Life assurance is a policy that pays out a lump sum to a named beneficiary upon the death of the insured person. It can provide personal financial protection for a family or be structured to support a business in the event of losing a key person or shareholder.

There are several types of life assurance in the UK:

• Level term assurance: Pays a fixed amount if the insured dies within a set period

• Whole of life assurance: Provides lifetime cover with a guaranteed payout

• Decreasing term assurance: Cover reduces over time, often linked to mortgages or loans

• Relevant life insurance: A specific policy for employers to provide tax-efficient life cover for an employee

• Key person insurance: Protects a business financially if a critical employee or director dies

Each policy serves a different purpose, and its tax treatment depends on how it is arranged and who benefits.

Is Life Assurance Tax Deductible for Individuals?

If you are paying for life assurance as a private individual, either as a sole trader or employee, the premiums are not tax deductible. This applies even if your reason for taking out the policy is to protect your family against the loss of your income.

For example:

• You are self employed and pay for a life assurance policy

• The policy will pay your spouse or dependants if you die

• The premiums are paid from your personal income

• You cannot claim the premiums as an expense on your tax return

Life assurance is classed as personal financial protection, not a business expense. Even though your death may affect your business, HMRC does not consider this sufficient justification for tax relief unless the business is the direct beneficiary of the policy.

Life Assurance for Sole Traders

Sole traders cannot claim tax relief on life assurance premiums, even if they feel the policy protects their business continuity. The business and the individual are legally the same entity, so the policy is treated as a personal cost.

You may be able to take out a policy to cover a business loan or to provide cash for your estate to settle business debts, but unless the business is a separate legal entity (such as a limited company), the tax rules will treat the premiums as non-deductible.

For policies taken out as part of estate planning, such as those written in trust, there may be Inheritance Tax advantages, but this is separate from the question of income tax deductibility.

Are Life Assurance Premiums Deductible for Limited Companies?

When a limited company pays life assurance premiums on behalf of a director or employee, the tax treatment depends on who benefits from the policy and the purpose of the cover.

Here are the main possibilities:

1. Relevant Life Policy

A relevant life policy is a specific type of life assurance that a limited company can set up for an employee or director. It pays out a tax-free lump sum to the individual’s family or nominated beneficiaries.

If structured correctly:

• The company pays the premiums

• The premiums are tax deductible for Corporation Tax

• The premiums are not classed as a benefit in kind

• There is no Income Tax or National Insurance due

• The payout is free from Inheritance Tax if written in trust

To qualify, the policy must:

• Only cover one employee or director

• Pay out on death before age 75

• Not have surrender value during the policy term

• Be written into a discretionary trust for the beneficiaries

Relevant life policies are widely used by company directors who want life cover funded by the company without affecting their personal tax position. It is one of the few types of life assurance that is fully tax efficient for both employer and employee.

2. Key Person Insurance

If the company takes out a key person life insurance policy on an employee or director, and the company is the beneficiary, the premiums may be tax deductible, provided the policy meets certain criteria.

The rules for key person insurance are:

• The company must suffer financial loss if the person dies

• The payout must go to the company to cover lost revenue or recruitment costs

• The policy must not be linked to shareholding or profit extraction

If these conditions are met, the company can deduct the premiums for Corporation Tax. However, if the company is not the beneficiary, or if the policy benefits the individual or their family, the premiums are not deductible.

Even if the company claims tax relief on the premiums, the insurance payout may be taxable as business income. This is an important consideration when deciding whether to structure the policy for Corporation Tax efficiency or to ensure the benefit is tax free.

3. Policies to Fund Shareholder Agreements

Some companies use life assurance to fund a shareholder protection agreement, allowing surviving shareholders to buy the shares of a deceased owner. In these cases, the policies are usually written on the lives of shareholders and the proceeds used to buy shares under a cross-option agreement.

Premiums for these policies are not usually tax deductible, because the benefit is ultimately personal. If the proceeds go to surviving shareholders or are used to benefit individuals rather than the company, HMRC does not allow a deduction.

Tax planning in these cases often focuses more on Inheritance Tax and succession strategy than on Corporation Tax deductions.

What If the Company Pays for Personal Life Assurance?

If your limited company pays for a life assurance policy that benefits you personally, but the policy is not a relevant life policy, the premiums are classed as a benefit in kind.

This means:

• The value of the premiums is taxed as part of your personal income

• The company must report the cost on a P11D form

• You pay Income Tax on the value of the benefit

• The company pays Class 1A National Insurance on the cost

• The company can still claim the cost as an expense, but the tax cost for you may outweigh the benefit

This route is rarely tax efficient and should be avoided unless the structure has specific financial planning advantages.

Conclusion

Life assurance is not usually tax deductible in the UK if it provides a personal benefit to the policyholder or their family. However, there are exceptions, particularly for companies using relevant life policies or key person insurance for genuine business purposes.

For limited companies, structuring a policy correctly can provide tax relief on premiums and a tax-free payout, offering significant savings for both the company and the individual. For sole traders and individuals, premiums must be paid from post-tax income, though planning through trusts can offer Inheritance Tax benefits.

Getting the tax treatment wrong can lead to unexpected liabilities, benefit in kind charges or loss of deductions. For this reason, it is essential to take advice from an accountant or financial adviser when setting up any form of business-funded life assurance. The right policy structure can make the difference between efficient protection and a costly tax mistake.