Many employers who offer group life assurance do so through a registered scheme, and for the majority of workforces that remains the right approach. But excepted life schemes have become increasingly relevant over the past few years, and with significant changes to inheritance tax on death benefits coming in April 2027, it’s a distinction more employers should understand.
This is a technical area, and the right answer depends on individual employee circumstances. What follows is a plain-English explanation of the key differences, not a substitute for specialist advice, but a useful starting point. If in any doubt, you should contact a solicitor for advice.
The Basics: Both Are Written Under Trust
Both registered and excepted group life schemes pay a lump sum to an employee’s dependants on death in service. Both are written under a discretionary trust, which means the benefit does not ordinarily form part of the deceased’s estate and can be paid quickly to beneficiaries.
The difference lies in how each type of trust is structured, and the tax rules that flow from that.
Registered Schemes
A registered group life scheme is registered with HMRC as a pension scheme. This is the most common form of group life cover in the UK: straightforward to set up, well understood by insurers, and subject to clear HMRC rules.
Because it is classed as a pension, the death benefit from a registered scheme counts towards the Lump Sum and Death Benefit Allowance (LSDBA), which currently stands at £1,073,100 for 2025/26. Where the total of an individual’s pension funds and lump sum death benefits exceeds that threshold, the beneficiaries become liable to income tax on the excess at their marginal rate.
For most employees, this is unlikely to be a problem. But for higher earners, particularly those with substantial pension funds alongside a generous death-in-service multiple, the combined figures can exceed the allowance, creating an unexpected tax liability for the people the benefit was designed to protect.
Excepted Schemes
An excepted group life scheme sits outside the pension framework. It is not registered with HMRC as a pension scheme, which means the death benefit does not count towards the LSDBA. For employees whose combined pension and death benefit could otherwise exceed the allowance, an excepted scheme can ensure the full benefit reaches their dependants without an income tax charge on the excess.
Excepted schemes were originally used primarily for equity partners and LLP members, where a registered scheme created specific tax complications. They are now used more widely, particularly to provide cover for employees whose pension savings or benefit levels could make the LSDBA relevant.
There are some limitations worth being aware of. Excepted schemes can only provide lump sum benefits, not annuities. They are also subject to discretionary trust tax rules, which can give rise to inheritance tax considerations, specifically entry charges, periodic charges at ten-year anniversaries, and exit charges. In practice, most excepted trusts are reviewed and restructured before a periodic charge arises, but this does add an ongoing administration consideration.
Why This Is More Relevant Now
The reason this distinction matters more today than it did five years ago is the inheritance tax changes coming in April 2027.
From that date, most unused pension funds and death benefits from registered pension schemes will be brought within the scope of inheritance tax at a rate of 40%. This is a significant change: currently, registered pension death benefits are generally outside an individual’s estate for IHT purposes.
Death in service benefits paid from excepted group life policies are expected to remain outside the scope of IHT after April 2027, which means an excepted scheme may offer better protection for some employees’ beneficiaries as the legislative landscape changes.
It is worth noting that this area of legislation is still developing. The government has published draft legislation and consulted on the detail, but employers and advisers should keep a close eye on further guidance from HMRC as the April 2027 date approaches.
Do You Need to Do Anything?
For many employers, a registered scheme will remain entirely appropriate. The LSDBA and the incoming IHT changes are most likely to affect higher earners with significant pension savings. For a workforce where most employees are well within the allowance, the practical impact is limited.
But it is worth reviewing your current scheme design, particularly if:
- You have senior employees or high earners with large pension funds
- Your death-in-service benefit is set at a high multiple of salary
- You haven’t reviewed your group life arrangements since the pension lifetime allowance was abolished in April 2024
Some employers operate both a registered and an excepted scheme, covering different employee groups under each, to ensure the right structure is in place for each level of the workforce.
The detail matters here, and the interaction between your group life scheme, individual pension positions, and the incoming tax changes is genuinely complex. Our piece on what group life assurance is and how it works covers the fundamentals if you want a grounding before going further.
HWWA Consulting can help you review your current arrangements and work out whether your scheme structure remains appropriate for your workforce. Book a free benefits review and we’ll take a look.
