Answered by Alicia Hempsted
How Is Death In Service Insurance Taxed?
The typical arrangement of a Death in Service scheme is that an employer pays the premiums for the policy while the employee’s family is the person to benefit from it. This can cause a fair amount of confusion as to when a Death in Service policy is taxed and who pays the tax.
Put simply, Death in Service premiums and benefits are not typically subject to taxation, making it one of the most tax-efficient options for life cover available.
Death in Service policies, on the side of the employer, are also generally considered a business expense. This means that there is typically no need to pay corporation tax on Death in Service premiums.
Meanwhile, Death in Service Insurance is not usually considered a P11D or Benefit in Kind, which means that employees don’t need to pay additional tax if they receive it as an employee benefit.
Also, thanks to the unique structure of Death in Service cover, there’s typically no inheritance tax for the employee to pay on the benefit, either. This is because the payout of a Death in Service policy doesn’t go directly to the employee’s family.
Instead, the payment goes into a company owned trust rather than onto the employee’s estate. It is then the responsibility of the employer to distribute the lump sum to the deceased employee’s loved ones.
Paying the claim to the employer instead of the family means that the payout of the policy avoids inheritance tax, meaning that an employee’s loved ones are able to receive the full amount.
In contrast to a Death in Service policy, individual Life Insurance policy needs to be actively written into trust if this is what you want to do when the policy is taken out. Not doing so means that the payout will be added to the deceased person’s estate and potentially therefore taxed as a result.
Employee Benefits Consultant at Drewberry
Frequently Asked Employee Benefits Questions
Excellent service from start to finish. Both Jack & Jake were both helpful and polite through the process. I would recommend Drewberry to family and friends.
Victoria Slade has been consistently prompt, personable, efficient and a great communicator. It is the first time that we have had straightforward dealings with financial services since becoming qualified doctors 20 years ago. Well done!
Oliver was great at explaining things, with patience. He called back when he said he would, and spent a lot of time to make sure the policy meets my needs.