Key person insurance tax: what HMRC allows

Or a partner

Cover on yourself

You are the employer

Cover on a key employee

It can be.

HMRC’s Business Income Manual (BIM45525) allows the premiums only if the sole purpose is meeting a loss of trading income, not a capital loss, and, for life cover, the policy is term insurance with no other benefits.

HMRC says whether the purpose test is met is a question of fact.

Check your policy with your accountant. HMRC BIM45525 ↗

A key man insurance payout can be.

Where both of HMRC’s conditions are met, the premiums are deductible and the payout is income of the trade: under section 103 of the Corporation Tax Act 2009 for a company, or section 106 ITTOIA 2005 for an unincorporated business.

Where the premiums were not deductible, HMRC says the payout is generally not trading income, but it gives no assurance that a future receipt will be excluded. HMRC BIM45525 ↗

BIM45525 sets two conditions for a deduction: the sole purpose is the trade purpose of meeting a loss of trading income, and a life policy is term insurance with no other benefits, for a term no longer than the person’s usefulness to the company.

BIM45530 lists circumstances that may point to a non-trade purpose, such as cover only on directors who are major shareholders. HMRC BIM45525 ↗

The payout goes to the business, so any tax on it is the business’s.

Where the premiums were deducted, HMRC treats the payout as trading income.

The Association of Taxation Technicians says that, as key person insurance is for the employer’s benefit, there should be no employment tax issues for the employee. ATT article ↗

The Association of Taxation Technicians says there should be no employment tax issues for the key person, because the policy is for the employer’s benefit and any claim is paid to the employer.

None of the HMRC pages this guide cites addresses National Insurance on key person premiums directly, so confirm it with your accountant or payroll adviser. ATT article ↗

Not on cover for themselves.

HMRC says premiums a sole trader or partner pays for life, accident or sickness cover on themselves or a partner are not allowable deductions, and the benefits are not trading income.

Cover on a key employee is a different case: the BIM45525 conditions apply, and a payout on a deductible policy is trading income under section 106 ITTOIA 2005. HMRC BIM45560 ↗

Only if it meets HMRC’s two conditions: a sole trade purpose of meeting lost trading income, and term cover with no other benefits.

If it does, the premiums are deductible and, for a company, a payout is income of the trade under section 103 of the Corporation Tax Act 2009. HMRC BIM45525 ↗

The Association of Taxation Technicians says that if the insurance is to cover the settlement of a liability such as loan finance, the premiums would not be an allowable deduction.

HMRC’s first condition excludes a capital loss, and its Corporate Finance Manual gives key person premiums as an example of spending not incurred directly for the purposes of a loan relationship. ATT article ↗

It can.

HMRC’s manual lists cover only on directors who are major shareholders, and not other employees, as a circumstance that may point to a non-trade purpose, and it names no percentage.

Legal & General and LV= both point to a shareholding under 5%.

That is the insurers’ rule of thumb, not HMRC’s. HMRC BIM45530 ↗

No. Legal & General says key man insurance means the same thing as key person insurance.

HMRC’s manual deals with it as key person insurance, and the same two conditions in BIM45525 decide whether the premiums are deductible and how a payout is taxed. Legal & General ↗

Your company’s own rate for the accounting period.

GOV.UK gives a main rate of 25% for profits over £250,000 and a small profits rate of 19% for profits of £50,000 or less, with marginal relief in between.

A deductible premium reduces taxable profits, and a payout on a deductible policy is a trade receipt under section 103 of the Corporation Tax Act 2009. GOV.UK corporation tax rates ↗

Differently from key person cover.

Royal London says no tax relief is likely on premiums where the person covered is a shareholder.

LV= says share protection premiums are normally paid by the shareholders, and if the business pays them they are taxed as a P11D benefit in kind.

In a company buyback, Royal London says the proceeds should not be subject to corporation tax.

See our shareholder protection guide. Royal London tax guide ↗

That is not key person cover.

The Association of Taxation Technicians says that where the company pays the premiums for life insurance a director took out personally, the premiums should be treated as a benefit in kind on form P11D (or via payroll from April 2027) and are subject to Class 1 National Insurance. ATT article ↗

HMRC’s manual covers critical illness key person policies, and the sole-purpose condition applies to them.

It says critical illness or accident policies with an investment content, where premiums contribute to a capital investment, are capital expenditure and not deductible. HMRC BIM45525 ↗