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 additional tax be taken from my salary or does my employer pay tax on the policy?

Question asked by Charlie Hotson
Compare Top 10 UK Insurers
FREE Independent & Impartial Advice
Type of Cover
Company Name
 
Number of Employees

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.

Nadeem Farid
Employee Benefits Consultant at Drewberry

Group Life Insurance
 
Death In Service
 
Employee Benefits
 
Tax
 
This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
Compare Top 10 UK Business Insurers

Frequently Asked Employee Benefits Questions

 
We are an established partnership and are wondering whether given our set-up we can take out key person...
 
I keep hearing people talk about key man insurance but what does it actually cover and what is...
 
I am a director of my own limited company and have been considering life insurance and came across relevant...
 
We are a rapidly expanding business and wanted to know whether we are limited in the amount of key person...
Need Help? Live chat now and get an instant answer from our Experts...

Neil
Pensions

Victoria
Insurance
Our Latest Reviews
Paul Henderson
14/12/2018

Very helpful and professional advice. Would recommend using Drewberry if you are looking for help with Relevant Life Insurance.

Glenn Harris
15/12/2018

I cannot commend highly enough the quality of advice and service I have received from Drewberry. Jake kept me fully informed throughout the process until the insurance was finalised.

Julian Tomkins
10/12/2018

Great job on Life insurance. Phoned back quickly. And quickly found me good alternative when issue with first provider. All super easy to set up and do.

We are rated 4.9/5 based on 1966 independent client reviews.
To read more of our independent client reviews click here →
REVIEWS
EXCELLENT
4.92 / 5 Average
1916 Reviews
Verified Buyer
Overall Rating
The whole process was a pleasure. Drewberry we're easy to deal with, polite, knowledgeable and helpful
Verified Buyer
Overall Rating
Very good, clear service would recommend to friends and family
Anon
Overall Rating
Sam Carr provided an efficient and professional service.
Verified Buyer
Overall Rating
Sam Carr provided a professional but enthusiastic service and helped make the whole process very straight forward. Goodness knows I have been through enough application forms recently. My insurance product was never going to be easy to find and I had been rejected on a number of other occasions through others ironically due to well managed common health conditions. I identified Drewberry in a last and disappointing trawl on th web to find someone that actually wanted to take on a difficult case like me. Some brokers wouldn't even consider me. When we applied for my first choice product Sam wasn't at all deterred by the long wait for my GP report or the final rejection that came back from the insurer, sadly I have become used to it. Within a day he had lined up the second choice and to my surprise he had hit the nail on the head and introduced me to the correct insurer and terms for my needs whilst nogotiating an excellent premium. I am extremely satisfied with what Sam has achieved for me and I would have no hesitation in recommending either him or Drewberry to friends, family and and business contacts. In the future, Drewberry will be my first point of contact. Many thanks!
Kym
Overall Rating
Tailored to my need and the staff gave very good service