Group Life Assurance and Death in Service Benefits: An Employer's Guide

Group life assurance — commonly known as death in service — is one of the most widely provided and highly valued employee benefits in the UK. It pays a tax-free lump sum (or in some cases, a pension for dependants) to the family of an employee who dies while in employment. For employers, it is relatively inexpensive to provide and represents genuine financial protection for employees' families.

However, for higher earners, business owners, and company directors, group life assurance operates within a complex framework of pension tax rules, trust law, and HMRC requirements that can produce unexpected consequences if not properly structured. This guide explains how group life schemes work, the important differences between registered and excepted schemes, the expression of wishes process, and how the interaction with the lump sum and death benefit allowance affects high earners.

This is general information, not personal tax or financial advice. Scheme structuring for company directors and high earners requires specialist input from a qualified adviser.

What Is Group Life Assurance?

Group life assurance is a policy placed by an employer that pays a benefit — typically a multiple of the employee's salary — to dependants or beneficiaries if the employee dies while employed. The policy covers all employees in the group (or a defined sub-group) under a single arrangement, with no individual medical underwriting for standard cover.

The benefit multiple is set by the employer and is typically two to four times annual salary for most employees. Senior staff, directors, and key individuals may receive higher multiples (five to ten times salary) either through the main scheme at a higher rate or through a separate supplementary arrangement.

Registered Group Life Schemes

Most group life assurance policies are registered schemes — they are registered with HMRC as occupational pension schemes (specifically, as registered group life death benefit schemes under Part 4 of the Finance Act 2004). This registration status confers significant tax advantages:

For the employer: Premiums paid by the employer are a deductible business expense for corporation tax purposes.

For the employee: The employer's premium payments are not treated as a benefit in kind — no P11D charge, no income tax on the premium. This makes group life assurance exceptionally tax-efficient for employees.

For the beneficiaries: Death benefits paid from a registered scheme are free from income tax up to the available allowance (as they are pension scheme death benefits, not income). However, they are subject to the scheme trustee's discretion and, importantly, to the lump sum and death benefit allowance framework that replaced the lifetime allowance.

Lump Sum and Death Benefit Allowance — The High Earner Problem

The most significant planning issue with registered group life schemes for higher earners relates to the lump sum and death benefit allowance and tax-free lump sum death benefits.

The pension lifetime allowance (LTA) charge was removed from 6 April 2023, and the LTA was abolished entirely from 6 April 2024. In its place, a new Lump Sum and Death Benefit Allowance (LSDBA) was introduced from 6 April 2024. The LSDBA is set at £1,073,100 and represents the maximum tax-free lump sum that can be paid from a registered pension or registered group life scheme during lifetime or on death (alongside a separate Lump Sum Allowance of £268,275 for tax-free lump sums taken in life).

For employees with significant pension funds and a high death in service benefit, the combined value may approach or exceed the LSDBA. The practical consequence is that any death benefit lump sum paid in excess of the available LSDBA is taxed at the recipient's marginal rate of income tax. This is an important planning consideration for senior executives with large pension savings.

For employees who have applied for Enhanced Protection or Fixed Protection (to protect benefits under the old LTA regime), it is critical to review how the group life scheme interacts with those protections before any change to the scheme.

Excepted Group Life Schemes

An excepted group life scheme operates outside the registered pension scheme framework. It is not a pension scheme at all; it is written under an excepted group life policy (specifically, under the Insurance Premium Tax rules and the Income and Corporation Taxes Act provisions for group life policies).

Why use an excepted scheme?

• The LSDBA limit does not apply. Benefits are not counted against the pension tax allowances.
• For employees who have pension protection (Enhanced or Fixed Protection), adding them to a registered group life scheme risks invalidating that protection. An excepted scheme avoids this entirely.
• High earners who have significant pension benefits and want a large death in service multiple can use an excepted scheme to separate the death benefit from their pension pot.

Tax treatment of excepted schemes: While the employer premium payments are still a business expense (subject to HMRC's wholly and exclusively for the purposes of trade test), the key difference is in how the death benefit is taxed. Under an excepted group life scheme:

• Benefits are paid through a special trust (the Excepted Group Life Trust) and fall outside the estate for IHT purposes.
• HMRC approves a "relevant percentage" of the lump sum — known as the HMRC Approved Lump Sum — that can be paid tax-free. The remainder may be subject to income tax in the hands of the beneficiary.
• The precise tax treatment depends on how the trust is structured and administered, and on the individual circumstances of the beneficiary.

For most standard death in service claims under an excepted scheme, the practical tax treatment is similar to a registered scheme — benefits are paid outside the estate and the trustees direct the payment at their discretion. However, the technical legal framework is different, and expert scheme administration is important.

Expression of Wishes and Discretionary Trusts

Both registered and excepted group life schemes typically operate through a discretionary trust. The employer (and in some cases, the employee) establishes a trust, and the insurer pays the death benefit to the trustees. The trustees then distribute the funds to beneficiaries based on the member's expression of wishes and their own assessment.

The expression of wishes (or nomination form) submitted by the employee is guidance to the trustees, not a binding direction. This discretionary structure is what keeps the payment outside the estate for IHT — if the employee had a legally enforceable right to direct the payment, HMRC might include it in the estate.

Employees should:

• Submit an expression of wishes when joining the scheme.
• Update it promptly following any major life event (marriage, divorce, birth of children).
• Name both primary and contingency beneficiaries.
• Discuss the nomination with their financial adviser, particularly in the context of estate planning.

Employers should ensure that their scheme trustees (whether a professional trustee firm, a master trust, or an insurer-provided discretionary trust service) have a robust process for collecting and updating nominations.

Spousal Bypass Trusts

A Spousal Bypass Trust (SBT) is a discretionary trust established by an individual — typically a business owner or senior executive — to receive their death in service benefits or pension lump sum, rather than those benefits passing directly to the surviving spouse.

The rationale is inheritance tax planning. If a death in service lump sum is paid directly to a surviving spouse, it passes IHT-exempt (under the spousal exemption) but then sits in the spouse's estate, potentially subject to 40% IHT on the second death. By directing the benefit into an SBT instead, the trustees can use the funds for the benefit of the spouse (or wider family) without the funds forming part of the spouse's estate.

SBTs are established alongside — not within — the group life scheme. The SBT is named as one of the potential beneficiaries in the expression of wishes; the trustees of the group life scheme then pay the benefit to the SBT trustees.

SBTs are useful planning tools but warrant fresh consideration given the legislated change, taking effect from 6 April 2027, that brings most unused pension funds within the scope of inheritance tax. The interaction of SBTs with the wider estate plan should be reviewed with a specialist estate planning solicitor and financial adviser.

Free Cover Limits and Individual Underwriting

For groups above a minimum size, insurers typically provide cover up to a free cover limit without individual medical underwriting. This means employees join the scheme and receive cover without medical questionnaires or health assessments, provided their benefit does not exceed the free cover limit.

Above the free cover limit, the insurer will require individual underwriting (which may result in standard acceptance, an increased premium, or an exclusion). Free cover limits vary by scheme size and insurer.

For very small companies — typically fewer than five or ten employees — free cover limits are often not available, and all employees may require individual underwriting. This can create difficulties for business owners who are older or have pre-existing health conditions.

Group Life for Company Directors

For company directors — particularly owner-directors of small and medium enterprises — group life assurance requires careful planning:

• A sole director is typically the only member of the group scheme, which may not qualify for free cover limits.
• A director who is also a significant pension saver may need an excepted scheme to avoid LSDBA implications.
• A relevant life policy — a single-life policy paid for by the company, delivering benefits outside the estate — may be more appropriate than a group scheme for a small company (see the separate guide on relevant life policies).

The choice between a group scheme and a relevant life policy, and between registered and excepted structures, depends on the number of employees, their benefit levels, pension positions, and tax status. This requires specialist advice from a qualified employee benefits adviser.

How Global Investments Can Help

Global Investments works with business owners and company directors who need to ensure that their death in service arrangements are tax-efficiently structured and aligned with their overall estate plan. For directors with significant pension savings, the LSDBA implications of a registered group life scheme are a real planning risk; an excepted scheme or relevant life policy may be more appropriate.

We can introduce clients to specialist employee benefits advisers who will design the right structure for their company's specific needs, and coordinate the group life arrangement with pensions, estate planning, and trust structures.

This guide is for general information only and does not constitute financial, tax, or legal advice. Tax rules, allowances, and HMRC treatment of group life schemes are subject to change. The pension annual allowance and death benefit allowance rules in particular have been subject to significant change in recent years and further changes may follow. Always seek advice from a qualified, FCA-authorised specialist before making decisions. Values and tax treatment can change; rules change; seek professional advice.