Employee group life cover: protection from unexpected tax charges
Could an excepted group life policy give employees more peace of mind?
In certain circumstances, ‘death in service’ payments can be subject to tax, potentially at penal rates. The possibility that family members, or other dependants, might receive less financial support than intended at a difficult time can concern employees who participate in group life plans. However, employers could prevent these tax risks, and provide a more attractive life cover offering to their workforce, by using excepted group life policies (EGLPs). If properly structured, EGLP life cover can enable ‘death in service’ benefits to be paid tax-free. However, care should be taken both to ensure that a qualifying EGLP is established and to prevent certain adverse tax consequences being triggered. We are seeing more employers consider EGLP group life cover as part of their employee value proposition.
When can tax charges arise when death in service benefits are paid?
Employers who provide ‘death in service’ life cover (under which, following an employee’s death, a lump sum equal to a multiplier of salary is paid out) should be aware of two important risks:
The prospect that any such death benefit, if paid directly by the employer or by an insurer under a ‘non-EGLP’ policy (see below), could be fully subject to income tax in the recipient’s hands; and
Any such death benefit, if provided via a registered pension scheme (RPS) – whether a ‘true’ pension scheme or a ‘stand-alone’ death benefits scheme – might wholly or partly be subject to penal tax.
This latter risk is particularly acute given the repeated reductions in the lifetime allowance (LTA) over the years. At one time £1.8m, the standard LTA is now only £1,073,100 and has been ‘frozen’ at this level until 5 April 2026. Whilst some employees may be entitled to higher ‘protected’ LTA levels, in certain circumstances simply joining an RPS – even a ‘stand-alone’ death benefits scheme – may actually invalidate such protection.
How can employees and their dependants be protected?
Fortunately, setting up an EGLP – to be held under a trust – is a relatively simple way of preventing a post-death tax charge from arising. Any death benefit paid under an EGLP should be exempt from income tax by virtue of specific legislation, and also be outside the scope of RPS-related penal taxes.
An insurance policy will be classed as an EGLP provided it satisfies certain statutory conditions – for example, benefits must be calculated in the same way for all employees covered under the policy. There is also a prohibition on one of the policy’s ‘main purposes’ being tax avoidance. It is difficult to see how this could normally be the case as – whilst adopting an EGLP could be seen to have tax efficiency as a key consideration – the relevant legislation expressly provides for EGLPs’ existence, and therefore as a choice when providing employee group life cover. Caution should, however, be exercised and tax advice taken relevant to the precise characteristics of the target employee population and overall reward offering for death in service benefits.
What else should employers consider?
Employers will also need to take various other considerations into account – for example:
will more than one EGLP be required (bearing in mind the requirement for benefits to be calculated in the same way for all employees covered under the policy)?;
the fact that EGLPs (unlike RPSs) do not enjoy a general exemption from IHT – whilst it should be possible to prevent IHT being incurred, unless care is exercised an IHT charge could arise in certain circumstances (e.g. at the 10-year anniversary of the trust’s creation);
the corporation tax position; and
the fact that any salary/bonus sacrifice arrangement (in return for increased levels of life cover) could potentially complicate matters e.g. the optional remuneration arrangement taxing rules.
An EGLP is, therefore, potentially a very attractive way of providing life cover –usually justifying the extra administration/costs involved. Caution should, however, be exercised – both to ensure that a qualifying EGLP is indeed established and also to minimise residual adverse tax consequences (under the IHT ‘ten-year anniversary’ rules or otherwise).
Home >Articles > Employee group life cover: protection from unexpected tax charges
Employee group life cover: protection from unexpected tax charges
Could an excepted group life policy give employees more peace of mind?
In certain circumstances, ‘death in service’ payments can be subject to tax, potentially at penal rates. The possibility that family members, or other dependants, might receive less financial support than intended at a difficult time can concern employees who participate in group life plans. However, employers could prevent these tax risks, and provide a more attractive life cover offering to their workforce, by using excepted group life policies (EGLPs). If properly structured, EGLP life cover can enable ‘death in service’ benefits to be paid tax-free. However, care should be taken both to ensure that a qualifying EGLP is established and to prevent certain adverse tax consequences being triggered. We are seeing more employers consider EGLP group life cover as part of their employee value proposition.
When can tax charges arise when death in service benefits are paid?
Employers who provide ‘death in service’ life cover (under which, following an employee’s death, a lump sum equal to a multiplier of salary is paid out) should be aware of two important risks:
The prospect that any such death benefit, if paid directly by the employer or by an insurer under a ‘non-EGLP’ policy (see below), could be fully subject to income tax in the recipient’s hands; and
Any such death benefit, if provided via a registered pension scheme (RPS) – whether a ‘true’ pension scheme or a ‘stand-alone’ death benefits scheme – might wholly or partly be subject to penal tax.
This latter risk is particularly acute given the repeated reductions in the lifetime allowance (LTA) over the years. At one time £1.8m, the standard LTA is now only £1,073,100 and has been ‘frozen’ at this level until 5 April 2026. Whilst some employees may be entitled to higher ‘protected’ LTA levels, in certain circumstances simply joining an RPS – even a ‘stand-alone’ death benefits scheme – may actually invalidate such protection.
How can employees and their dependants be protected?
Fortunately, setting up an EGLP – to be held under a trust – is a relatively simple way of preventing a post-death tax charge from arising. Any death benefit paid under an EGLP should be exempt from income tax by virtue of specific legislation, and also be outside the scope of RPS-related penal taxes.
An insurance policy will be classed as an EGLP provided it satisfies certain statutory conditions – for example, benefits must be calculated in the same way for all employees covered under the policy. There is also a prohibition on one of the policy’s ‘main purposes’ being tax avoidance. It is difficult to see how this could normally be the case as – whilst adopting an EGLP could be seen to have tax efficiency as a key consideration – the relevant legislation expressly provides for EGLPs’ existence, and therefore as a choice when providing employee group life cover. Caution should, however, be exercised and tax advice taken relevant to the precise characteristics of the target employee population and overall reward offering for death in service benefits.
What else should employers consider?
Employers will also need to take various other considerations into account – for example:
will more than one EGLP be required (bearing in mind the requirement for benefits to be calculated in the same way for all employees covered under the policy)?;
the fact that EGLPs (unlike RPSs) do not enjoy a general exemption from IHT – whilst it should be possible to prevent IHT being incurred, unless care is exercised an IHT charge could arise in certain circumstances (e.g. at the 10-year anniversary of the trust’s creation);
the corporation tax position; and
the fact that any salary/bonus sacrifice arrangement (in return for increased levels of life cover) could potentially complicate matters e.g. the optional remuneration arrangement taxing rules.
An EGLP is, therefore, potentially a very attractive way of providing life cover –usually justifying the extra administration/costs involved. Caution should, however, be exercised – both to ensure that a qualifying EGLP is indeed established and also to minimise residual adverse tax consequences (under the IHT ‘ten-year anniversary’ rules or otherwise).
