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Key Person Insurance Tax
UK Tax Guide 2026
Is key person insurance (key man insurance) tax deductible? Complete guide to UK tax treatment.
Understand when key person insurance premiums are tax deductible and how payouts are taxed.
Tax DeductibleHMRC RulesCorporation TaxBusiness Expense
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- Premiums: May be tax deductible as a business expense if HMRC criteria are met (see BIM45525).
- Deductible if: Policy is solely for business benefit, covers loss of profits, key person is an employee, and term matches service expectation.
- Not deductible if: Policy is for loan protection, payout goes to family, or key person is a shareholder-only.
- Payouts: If premiums were deducted, the payout is typically taxable as trading income.
- Corporation tax: Qualifying premiums reduce corporation tax liability.
- Relevant legislation: S103 Corporation Tax Act 2009, HMRC Business Income Manual BIM45525.
Tax rules are complex. Always consult a qualified accountant for advice specific to your business.
Key Person Insurance Tax: Quick Summary
The tax treatment of key person insurance depends on the purpose of the policy. Here's a quick overview. Under HMRC BIM45525, key person insurance premiums may be deductible as a trading expense when the policy protects against lost profits. According to the ABI, UK insurers paid a record £8bn in protection claims in 2024, so getting the tax position right matters.
May Be Tax Deductible If:
- •Policy is solely for business benefit
- •Covers loss of profits from losing the key person
- •Key person is an employee (not just shareholder)
- •Policy term is reasonable (not excessive)
Payout is taxable as trading income
NOT Tax Deductible If:
- •Policy protects a business loan
- •Used for shareholder protection
- •Key person is shareholder only (not employee)
- •Personal benefit to the key person
Payout is usually tax-free
Important: Tax rules are complex. Always consult a qualified accountant or tax advisor for advice specific to your situation.
HMRC Rules for Key Person Insurance Tax
HMRC has specific criteria for when key person insurance premiums qualify as a tax-deductible business expense.
1. Sole Purpose Must Be Business Benefit
The key person insurance policy must be taken out solely for business purposes. Any personal benefit to the key person or their family could invalidate the tax deduction.
Example: A policy that pays out to the company to cover lost profits is likely deductible. A policy that pays the key person's family is NOT.
2. Cover Loss of Profits (Not Loans)
Key person insurance taken to cover potential loss of profits is typically deductible. Policies taken to protect or repay loans are usually NOT deductible.
Example: Insurance to cover the profit the key person would have generated = deductible. Insurance to repay a bank loan = not deductible.
3. Key Person Must Be an Employee
The key person must be an employee of the business, not just a shareholder. Director-shareholders who draw a salary typically qualify.
Note: Sole traders cannot have key person insurance on themselves as they are not employees. Consider relevant life insurance instead.
4. Reasonable Policy Term
The policy term should be reasonable based on how long the person is expected to remain key to the business. Excessively long terms may be challenged.
Guidance: 5-15 year terms are typically considered reasonable. Match the term to expected employment period.
How Are Key Person Insurance Payouts Taxed?
The tax treatment of key person insurance payouts follows a simple principle: deductible premiums = taxable payout.
If Premiums Were Deductible
Premiums reduced your taxable profits
Payout is taxable as trading income
Subject to Corporation Tax at current rate
If Premiums Were NOT Deductible
Premiums did NOT reduce taxable profits
Payout is usually tax-free
Applies to loan protection policies
Tax Treatment by Policy Type
Different types of business protection insurance have different tax treatments.
| Policy Type | Premiums | Payout |
|---|---|---|
| Key Person (Loss of Profits) Cover trading losses from losing key person | Usually Deductible | Taxable |
| Key Person (Loan Protection) Cover business loans secured on key person | Not Deductible | Tax-Free |
| Shareholder Protection Buy shares from deceased shareholder's estate | Not Deductible | Tax-Free |
| Relevant Life Insurance Death-in-service benefit for employees | Deductible | Tax-Free to Family |
Key Person Insurance Tax FAQs
Is key person insurance tax deductible?
Key person insurance premiums may be tax deductible if the policy meets HMRC criteria: solely for business benefit, covers loss of profits (not loans), the key person is an employee, and the term is reasonable. Always consult a tax advisor.
Do I pay tax on a key person insurance payout?
If key person insurance premiums were tax deductible, the payout is taxable as trading income. If premiums were NOT deductible (e.g., loan protection), the payout is usually tax-free. You can't have both!
What about National Insurance?
Key person insurance premiums are not a benefit-in-kind for the key person, so there's no P11D or NIC liability. The company pays the premiums as a business expense.
Can sole traders claim tax relief on key person insurance?
Sole traders cannot take key person insurance on themselves as they are not employees. However, they may be able to insure key employees. Consider personal life insurance or relevant life insurance instead.
Official HMRC Guidance
For authoritative guidance on key person insurance tax treatment, refer to these official HMRC resources.
Return to our main key person insurance guide or compare keyman insurance options.
Trusted Sources
This guide references: HMRC BIM45525 (tax treatment of key person premiums), ABI Claims Data 2024 (UK insurers paid a record £8bn in protection claims), FCA Insurance Guidance, and MoneyHelper.
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