Death in Service Schemes - the tax pitfall to avoid

James MacAulay

James MacAulay

Technical Manager

Most Death in Service (DIS) schemes are structured under pensions scheme rules, which is normally best from both an employer and employee's perspective.

However, recent changes in the limit people can save into a pension may mean that some of your most valuable employees could leave their beneficiaries with a large tax bill as a result.

In some cases, this could reduce the pay-out from the DIS by up to 55%.

This is because most people are subject to a maximum lifetime pension saving of £1m, with any lump sum payments above this being taxed at 55%.

We regularly review these schemes and the majority are based on four times salary. Therefore, those on £100,000 a year will only have £600,000 of lifetime allowance remaining for their pension. While this is still a significant amount there will be key employees, or directors, who have saved dilligently all their life and their families could be penalised at the worst time possible.

What can be done?

It is possible to restructure your remuneration package so that these employees are protected using a 'Relevant Life Policy' which can provide the following benefits for you and your team:

  • Contributions can be paid by you without it being treated as a benefit in kind for the employee
  • Contributions are normally treated as an allowable business expense for corporation tax purposes
  • No National Insurance payments on the premiums or benefits
  • When structured properly can be paid free of tax
  • Benefits don't count towards lifetime pension allowances

These are not suitable for everyone though and specialist advice is required to ensure that they are effective. To find out whether this could work for you, or if you would like to discuss anything in this blog, please contact a member of our Wealth Team by email on or your usual local office Financial Planner.

All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices both of which are subject to change in the future. Levels and bases of reliefs from taxation are also subject to change, and are dependent on your individual circumstances.

Nothing in this blog constitutes advice to undertake a transaction and professional advice. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

Disclaimer: While all possible care is taken in the completion of this blog, no responsibility for loss occasioned by any person acting or refraining from action as a result of  the information contined in this blog.

Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.