Key person insurance is tax deductible for a UK business when the policy meets HMRC's conditions, and in that case any payout is taxed as the business's trading income. HMRC sets the conditions out in its Business Income Manual (BIM45525 and BIM45530, both pages dated 1 April 2016 and read on 21 October 2026).

If your company is weighing up cover, an FCA-authorised broker can discuss the key person and how the policy would be set up on a free call-back, which the form on this page arranges. Whether the premiums are deductible in your company's own case is for your accountant to confirm.

When are key person insurance premiums tax deductible?

BIM45525 deals with a policy an employer takes out for its own benefit, covering profits it could lose if an employee, director or other key person dies or suffers critical illness, sickness, an accident or injury. The premiums are allowable, the manual says, if all of its conditions are met, and there are two.

The sole purpose of taking out the insurance is the trade purpose of meeting a loss of trading income that may result from loss of the services of the key person, and not a capital loss.

In the case of life insurance policies, they are term insurance, providing cover only against the risk that one or more of the lives insured dies within the term of the policy, with no other benefits. The insurance term should not extend beyond the period of the employee's usefulness to the company.

Put simply, the cover has to be there to replace lost profit rather than to protect a capital asset, and a life policy has to be plain term cover lasting no longer than the person is useful to the business. The manual classes premiums on whole life or endowment policies as capital expenditure that will not be deductible, and says the same of critical illness or accident policies with an investment content, where the premiums go towards a capital investment. That is HMRC's published position, not tax advice, and the rules can change. How the cover itself works is explained in what key person insurance is for, and pricing in how much key person insurance costs.

Is a key person insurance payout taxable?

Yes, where the premiums were deductible. HMRC's wording is: "Where both conditions outlined above are satisfied, the premiums will be deductible, and sums received under such a policy will be income of the employer's trade under S106 ITTOIA 2005 for unincorporated businesses and S103 Corporation Tax Act 2009 for companies." A company that claims the premiums as an expense should expect the payout to be taxed as a trading receipt.

The reverse holds only as a general rule. Where a policy does not meet both conditions, the manual says the premiums generally cannot be deducted and the payout is generally not taxed as trading income. It treats those as two separate legal questions, though, and warns: "No assurance can be given that any future receipt will be excluded from trading income even though the premiums are not allowable".

Legal & General's technical guide for advisers (W13226, June 2026) is just as cautious: "It’s not right to assume that electing to give up Corporation Tax relief on the premiums would result in tax-free policy proceeds." Aviva's Business Protection Term Assurance Cover Details (EDCO1589 0126) likewise warn that corporation tax, income tax or capital gains tax may be due on a payout, with any tax depending on how the business is structured and why the cover was taken out.

What makes HMRC see a purpose other than trade?

Most disputes turn on the sole purpose test. BIM45530 calls it a question of fact, decided on evidence of what the directors (or, in an unincorporated business, the proprietors) were trying to achieve by taking out the policy and paying the premiums. It names two circumstances in which a non-trade purpose may be present: "where the policy is in respect of directors who are major shareholders but not other employees", and "if benefits under the policy exceed sick pay arrangements - or other employee benefits - typically offered to employees of equivalent status in similar concerns".

Its example is a director whose death would significantly affect the value of the company's shares. One purpose of insuring them may then be to protect the value of those shares, and so of the director's estate, which is not a trade purpose. In Beauty Consultants Ltd (2002) the Special Commissioner held that the premiums on all four policies in dispute were not paid wholly and exclusively for the company's trade. Where only some members of a group policy have a non-trade purpose, HMRC says the premiums may be apportioned on a reasonable basis.

You may also meet this ground under another name. Legal & General's guide for advisers speaks of the "Anderson principles", after comments made in 1944 by a former Chancellor, Sir John Anderson; the label is the insurer's, not HMRC's. Its criteria are a short-term policy, cover for an expected loss of profits, and an employer and employee relationship, with the policy and premiums arranged wholly and exclusively for business purposes. Where the key person owns an interest in the company it warns of complications, and for a director with a significant shareholding it says relief is unlikely if the tax inspector thinks the proceeds will benefit the life insured. Its rule of thumb: "A general rule is that where the shareholding is less than 5% tax relief should be available." The guide adds that the principles are not binding in law.

A policy that lets the remaining owners buy a shareholder's stake is shareholder protection, a different arrangement: see whether shareholder protection is tax deductible and what shareholder protection costs. If the person you want to insure is a director who also owns shares, an FCA-authorised broker can talk through how insurers would view the policy on a free call-back, and your accountant can then judge the tax.

Why are loan-linked key person policies treated differently?

BIM45525 has a separate passage on key person policies tied to borrowing, where a lender asks for an endowment policy on a key person's life as a condition of long-term finance. For an unincorporated business, those premiums do not count as costs incidental to obtaining the finance, so they are not deductible. For a company, the manual concludes: "In short, no loan relationship debit is available under these rules for the premiums paid on such a policy as they are not considered to be incidental costs of obtaining loan finance".

Legal & General's adviser guide takes a similar line: premiums on a policy meant to cover repayment of a loan are, in its view, unlikely to be allowable expenses. Cover for business borrowing has its own page, business loan protection insurance, and cover a company buys for an employee's own family is explained under relevant life insurance tax treatment.

Is key person insurance a benefit in kind, and what about P11D and the accounts?

In Legal & General's description of key person cover, the employer owns and pays for the policy and receives any pay-out, and HMRC's manual likewise starts from an employer insuring in its own favour. Sickness and life policies taken out in employees' names or on their behalf are a separate case: BIM45525 refers them to HMRC's guidance on pension schemes at BIM46140. Whether cover an employer pays for counts as a taxable benefit for the employee is the subject of is life insurance a taxable benefit?

A P11D is the form, in GOV.UK's guidance for employers, that is completed for each employee given taxable expenses or benefits that were not payrolled. Whether a particular key person arrangement means anything must be reported for the person insured, and how the premiums and any payout are shown in the company's accounts, are questions for the company's accountant, who can check them against the policy documents.

As a next step, the form on this page takes the company's details, and an FCA-authorised broker rings back at no cost to go through who would own the policy and who would receive a payout, which you can then take to your accountant. More on business cover is in the business and workplace cover guides.

Frequently asked questions

Can a sole trader or partnership deduct key person insurance?

HMRC's manual covers unincorporated businesses as well as companies: where both conditions are met, the payout is taxed as trading income under S106 ITTOIA 2005. How that applies to a particular sole trader or partnership is for an accountant. A sole trader's own life cover is dealt with in life insurance tax relief for the self-employed.

Can the business ask HMRC in advance how a policy will be treated?

Legal & General's adviser guide recommends asking the company's tax inspector in each case, and includes a specimen letter asking HMRC to confirm the treatment of the premiums and the proceeds in writing. It warns that, unlike premiums, "it is unlikely that the inspector would give any clear indication about the potential future treatment of proceeds". An accountant can make the approach.

Can critical illness cover for a key person be deducted?

HMRC lists critical illness among the events a key person policy can insure against, and the same sole purpose test applies. A critical illness policy with an investment content is treated as capital expenditure, so its documents are worth checking for any investment element.

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