11 Purdeys Way, Rochford, England, SS4 1ND
11 Purdeys Way, Rochford, England, SS4 1ND
Last updated: 15 October 2025
Quick answer: Premiums may be tax-deductible where the policy’s sole purpose is to protect trading profits (not capital, ownership or loan repayment). HMRC still applies the Anderson Principles (1944) to decide deductibility and whether a payout is taxed as trading income.
Policy clearly documents profit protection for a key employee/director; owned by the company; short-term cover.
Designed to repay a loan, fund a share buyback, or otherwise protect capital value.
Often taxed as trading income if you claimed relief on premiums; non-taxable if used solely to clear a loan.
When it comes to Key Man Insurance taxation in the UK, the rules still draw from guidance first set out by Sir John Anderson in 1944. HMRC uses these long-standing principles to decide whether policy premiums can be claimed as a business expense and whether any payout should be taxed as trading income.
In essence, HMRC focuses on the purpose of the policy — whether it protects trading profits (allowable) or capital interests such as ownership or loan repayment (non-allowable). These rules, known as the Anderson Principles, remain the foundation of how Key Person Insurance is taxed today.
Before we dive into the details, it helps to see how taxation differs across business structures. The table below compares how limited companies, partnerships, and LLPs are treated when setting up Key Person Insurance:
| Feature | Limited Company | Partnership | LLP |
|---|---|---|---|
| Who owns the policy? | The company | The partner (held in trust) | The LLP |
| Who pays the premiums? | The company | The partnership | The LLP |
| Tax relief on premiums? | ✅ Possibly (if Anderson Principles apply) | ❌ No | ✅ Possibly |
| Are proceeds taxable? | ✅ Yes, if tax relief was claimed | ❌ No | ✅ Depends on policy purpose |
Before diving into the tax rules, it’s worth a quick recap of what the cover actually is. Key Person Insurance is a business-owned policy that pays out if a vital employee or director dies or suffers a serious illness. The business—not the individual—receives the proceeds, using them to keep operations running, replace lost income, or recruit and train a successor.
Because the company pays the premiums and receives any payout, the question of how HMRC treats Key Person Insurance for tax purposes becomes important. In this guide, I’ll explain how the rules work, when premiums are allowable as a business expense, and how payouts are taxed depending on who is covered and why the policy was taken out.
Key Man Life Insurance tax treatment can be confusing for many businesses. Yet understanding how HMRC views it is essential if you want to stay compliant and claim every tax advantage available.
The key point is simple: Key Person Insurance can qualify for tax relief, but only if it meets HMRC’s criteria. HMRC treats it like any other form of business insurance — the company owns the policy, pays the premiums and receives the payout. However, those premiums are only tax-deductible when the policy clearly fits HMRC’s definition of an allowable business expense. In practice, that means some policies won’t qualify because they fail to meet the purpose test.
HMRC’s current guidance still follows the approach introduced by the Chancellor, Sir John Anderson, in 1944. He explained that when a business insures the life of an employee, the premiums can count as an allowable deduction, and any payout is treated as trading income. But he also set out several conditions that must be met — now known as the Anderson Principles.
Author’s note — Jody Pearmain, Managing Director: Over the years, I’ve found that most confusion arises when businesses assume every Key Person policy is automatically tax-deductible. HMRC looks at the purpose of the policy — if it’s purely to protect trading profits, it’s usually allowable, but if it’s designed to repay a director’s loan or buy back shares, it’s not. I always advise clients to document the commercial intent clearly at the point of application — it makes HMRC’s position far easier to justify later.
For official details on how HMRC treats key person insurance premiums and payouts for tax purposes, refer to the
HMRC Business Income Manual (BIM45525)
.
“If a policy is effected solely to cover the loss of profits resulting from the loss of services of a key employee, the premiums may be allowed as a trading expense. However, if the policy is intended to provide capital for a long-term purpose, such as repayment of loans or a share buyback, premiums are generally not deductible.” – HMRC
Introduced by Sir John Anderson in 1944, the Anderson Principles remain the basis of how HMRC determines whether a Key Man Insurance policy qualifies for tax relief.
In summary, HMRC may allow the premiums as a deductible business expense if:
Author’s note — Jody Pearmain: I explain these principles in detail in my full guide to the Anderson Principles. They’re still the foundation of HMRC’s approach today — but the key is how your accountant interprets “purpose.” If a policy is clearly documented as protecting profit, not capital, it’s far easier to justify the tax deduction.
Example 1 – Profit protection: A design agency insures its lead developer for £500,000 to cover the loss of trading income if they die or fall critically ill. The company owns the policy, pays the premiums and records in board minutes that the cover protects profit continuity. Result: premiums are usually allowable for Corporation Tax; any claim is treated as taxable trading income.
Example 2 – Capital protection: A business takes out a policy to repay a director’s £300,000 loan if they die. Result: premiums normally fail the “wholly & exclusively” test and are not deductible; the payout simply clears the loan and is not treated as trading income.
When it comes to Key Man Insurance taxation, HMRC doesn’t take a one-size-fits-all approach. The way premiums and payouts are treated for tax depends entirely on who the policy covers — an employee, a shareholder-director, or someone linked to a business loan.
If the insured person is a key employee (not a shareholder), HMRC typically allows the premiums as a business expense. The company pays the premiums, owns the policy, and receives any payout. Because it protects trading profits, not ownership or capital, it normally meets the Anderson Principles.
This is where most confusion starts. If the person insured owns shares or influences company value, HMRC could view the policy as protecting capital, not trading income. In that case, the premiums are not tax-deductible. However, the payout may increase the value of the shareholder’s estate for Inheritance Tax purposes.
Some businesses take out Loan Protection to repay debt if a key person dies or becomes critically ill. In this case, the benefit goes to the lender, not the business itself, so the premiums fail HMRC’s “wholly and exclusively” test. They’re not tax-deductible — but the payout also isn’t taxable because it simply clears the loan balance.
To recap, HMRC checks three key points before allowing relief:
Meet all three, and your Key Man Insurance premiums should qualify as a legitimate business expense. If the policy protects ownership, share value or long-term capital, tax relief will almost certainly be denied.
The HMRC rules can be complex, especially when directors are also shareholders. Our team specialises in business protection tax planning and can explain how these principles apply to your company. Call us on 0207 112 8844 or email us for tailored advice.
Key man insurance policies don’t provide benefits to employees or directors, so aren’t considered a benefit in kind.
Key Person Insurance premiums are tax-deductible if they meet all three criteria set out in the Anderson Principles. However, any claims and payouts will be considered trading receipts that must be taxed.
