Claiming a tax deduction for insurance premiums

This blog outlines the circumstances where claiming a tax deduction for insurance premiums would be considered allowable. It's important to understand the tax rules if you're thinking of getting your company to pay for this cost.

Tax treatment of directors keyman insurance

Claiming a tax deduction for insurance premiums generally

Whether claiming a tax deduction for insurance premiums will be considered allowable depends on the following:

  • What is actually being insured
  • The reason for taking out the insurance policy

The premiums must be incurred wholly and exclusively for the purpose of the business. This is a common theme for any expense where your business is looking to claim tax relief. If you're claiming a tax deduction for insurance premiums with a dual purpose, then no tax relief will be obtained. 

Where the insurance policy is capital in nature (for example to protect an asset) you are also unlikely to obtain a tax deduction. 

Generally speaking, if a tax deduction is allowed for the premium then any monies paid out will be taxable. Equally if no tax deduction is allowed, then any receipts from the policy will usually not be taxed.

In what circumstances are insurance receipts taxable?

Some common examples of where a payment from an insurance policy would be taxable are as follows: 

  • A payment made to compensate for a shortfall in profits
  • Insurance proceeds for damaged/lost stock
  • A compensatory payment for a fixed asset though only to the extent it compensates for the loss or expense which has been deducted for the purposes of the trade.

The tax treatment of directors keyman insurance

A company might take out a policy to insure against the loss of profits from the death, illness or injury of a director or key employee.  This is commonly known as a ‘key man’ or ‘key person’ insurance contract.

Any premiums paid would usually be tax deductible. This is because the policy is specifically to meet any potential shortfall in profits to compensate for the circumstances detailed above. 

In order to obtain a tax deduction for life insurance policy it must be for term insurance. In other words, only providing cover if the insured director/ key person dies within the term of the policy. No other benefits must be provided and the term cannot extend beyond the time the insured would be useful to the business.

In what circumstances would keyman insurance not be tax deductible?

HMRC's guidance details the circumstances where they consider the cost of a keyman policy would not be allowed. For example, where the policy relates to directors who are major shareholders, but not other employees. Another example would be where policy benefits exceed sick pay arrangements (or other benefits) typically offered to employees of equivalent status in equivalent circumstances.

What is the tax treatment of receipts from a keyman insurance policy?

Essentially if the premiums are tax deductible then any monies paid out under the policy will be taxable as trading income. Conversely if no tax deduction is obtained for the premiums then any monies received will not be taxable.

What about permanent health insurance policies?

Any premiums paid by a sole trader or partner to provide life, accident or sickness cover for themselves or a partner are not deductible. Any benefits paid out from this type of policy are not trading income, and are generally tax free.

For more useful information, check out our Ebooks here.

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