Is Life Insurance Tax Deductible for Self-Employed Workers?

Is-Life-Insurance-Tax-Deductible-for-Self-Employed-Workers

The self-employed have unique challenges when navigating the financial landscape. Among the many decisions they face is how to effectively manage their taxes.

One common query is whether life insurance premiums are tax-deductible for those who are self-employed. If you fall into this category, here's a simplified guide to help you understand the tax implications associated with life insurance.

What is Life Insurance?

Before diving into tax details, let's briefly explain life insurance. It's a contract between an individual and an insurance company. The individual pays premiums, and in return the insurance company agrees to provide a death benefit to the insured's beneficiaries upon their passing. The primary goal is to offer financial protection to loved ones.

Can Self-Employed Individuals Deduct Life Insurance Premiums?

In straightforward terms, life insurance premiums are generally not tax-deductible for self-employed individuals. This rule applies whether you're a freelancer, sole proprietor or running a small business.

There are specific reasons behind this:

  • Life insurance is typically seen as a personal expense, not directly related to the running or operation of your business.
  • Another reason is tied to the beneficiary. Since life insurance benefits are generally not taxable income for the beneficiary, the premiums leading to those benefits are not deductible.

What About ‘Relevant Life’ Policies?

However, there is an exception worth noting: Relevant Life Policies (RLP).

An RLP is a term assurance plan available to employers to provide an individual death-in-service benefit for an employee. For the self-employed:

  • Directors of limited companies can take out Relevant Life Policies. Here, the company pays the premiums, which can be treated as an allowable business expense. This means the company can claim tax relief on these premiums against corporation tax.
  • Payments made by the company do not count as a benefit in kind, so there's no additional income tax for the employee/director. Furthermore, the death benefit is typically not part of the director's lifetime pension allowance, giving more tax efficiency.

However, sole traders and partnerships in the UK cannot take advantage of Relevant Life Policies in the same way limited company directors can. Sole traders cannot claim life insurance as a business expense, as there's no distinction between personal and business finances in this business structure.

While life insurance is invaluable for ensuring your family's financial stability, it's essential to understand its tax implications, especially for the self-employed in the UK. In most scenarios, premiums aren't deductible. However, for those running limited companies, Relevant Life Policies offer a tax-efficient avenue.

Always consult with a UK-based tax professional or accountant to make informed decisions specific to your individual circumstances.

Written by

Luke Glassford

Marketing Director

Get a free quote now

Your craft deserves the best protection. With Mode Insurance, you're not just getting coverage -  you're gaining a partner who understands and supports your creative journey.