How Is A Death In Service Policy Taxed?

My new employer has enrolled me in a company Death in Service scheme, but I’m not sure if it’s a taxable benefit. Will HMRC take additional tax from my salary or does my employer pay the tax on the policy?

Question asked by Charlie Hotson

How Is Death In Service Insurance Taxed?

Under a Death in Service scheme the employer pays the premiums but the employee’s family are the ones who benefit from it. This can therefore cause confusion as to how and when HMRC taxes a Death in Service policy.

However, to put it simply, neither Death in Service premiums nor benefits are typically subject to taxation. This makes it one of the most tax-efficient options for life cover available.

Tax for the Employer…

For the employer, policies are generally considered a business expense. This means that there is therefore typically no need to pay corporation tax on Death in Service premiums.

Tax for the Employee…

Meanwhile, HMRC does not usually consider Death in Service Insurance 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 its unique structure, 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 goes into a trust rather than straight into the employee’s estate.

The trust’s administrators then pay the money out to the employee’s family after the death occurs. Doing so avoids inheritance tax, meaning that an employee’s loved ones receive the full benefit without having to worry about inheritance tax or probate.

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