Is Key Person Insurance Tax Deductible? | UK HMRC Rules 2026

Is Key Person Insurance Tax Deductible?HMRC Criteria & Rules

The short answer: key person insurance premiums may be tax deductible as a business expense if specific HMRC criteria are met. The policy must be solely for business benefit, cover loss of profits, and the key person must be an employee.

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Key Facts: Is Key Person Insurance Tax Deductible?

Key person insurance premiums may be tax deductible if specific HMRC conditions are met. Here is what you need to know.

-Premiums may be deductible as a trading expense against profits

-Policy must be solely for business benefit - no personal benefit element

-Must cover loss of profits, not loan repayment or capital purposes

-Key person must be an employee (directors who are employees qualify)

-If premiums are deducted, the payout becomes taxable trading income

-Policies for loan security or shareholder protection are NOT deductible

The HMRC Rules for Tax Deductible Key Person Insurance

HMRC sets out specific criteria that must all be met for premiums to be deductible.

1. Solely for Business Benefit

The policy must exist only to benefit the trade. If any part of the arrangement provides personal benefit to the key person or their family, it will not qualify for tax relief.

2. Covers Loss of Profits

The policy purpose must be to compensate the business for lost trading profits due to the key person's death or illness. Policies designed to repay business debts or buy shares are capital in nature and not deductible.

3. Employee Requirement

The key person must be an employee of the company. A shareholder who is not employed by the company does not qualify. Directors with a service contract are employees.

4. Reasonable Term

The policy term should match the expected period of the key person's service. A 25-year policy on a 60-year-old may be challenged by HMRC as unreasonable.

5. Term Assurance Only

The policy must be a term assurance with no surrender value. Whole of life, endowment, or investment-linked policies are not deductible.

6. Company is Beneficiary

The company must be the policy owner and beneficiary. If the policy is assigned to anyone else (lender, family, trust), it will not be deductible.

What Makes Key Person Insurance NOT Tax Deductible?

These scenarios will prevent tax deductibility.

Loan or Debt Protection

If the policy is to repay a business loan, overdraft, or other debt, it is capital in nature. HMRC will not allow tax deduction even if the key person is an employee.

Shareholder/Partner Protection

Policies designed to fund a share buyback or partnership buyout on death are capital transactions. These premiums are not deductible.

Personal Benefit

If the payout goes to the key person's family or estate rather than the business, there is personal benefit and the premiums are not deductible.

Non-Employee Key Person

If the insured person is a shareholder but not an employee of the company, premiums cannot be deducted. They must have a contract of employment or service agreement.

Is Key Person Insurance Tax Deductible FAQs

Is key person insurance tax deductible in the UK?

Key person insurance premiums may be tax deductible in the UK if the policy meets HMRC criteria: it must be solely for business benefit, cover loss of profits (not loans or share buyback), and the key person must be an employee. The relevant HMRC guidance is BIM45525.

Are key person insurance payouts taxable?

If the premiums were deducted as a business expense, the payout is taxable as trading income. If premiums were not deducted (because the policy was for loan protection or shareholder protection), the payout is typically tax-free as a capital receipt.

Can I claim key person insurance as a business expense?

You may be able to claim key person insurance premiums as a business expense if the policy is solely for business benefit, covers loss of profits, the key person is an employee, and it is a term assurance with no surrender value. Always consult an accountant for advice specific to your situation.