11 Purdeys Way, Rochford, England, SS4 1ND
11 Purdeys Way, Rochford, England, SS4 1ND
The Anderson Principles are the long-standing tax principles used when considering whether premiums for Key Person Insurance can be deducted from a business’s trading profits and how a future claim may be taxed.
They originate from a 1944 statement by Sir John Anderson. They are not FCA rules and they are not a separate piece of legislation. The practical rules used today are reflected in HMRC’s Business Income Manual, particularly BIM45525 and BIM45530.
The key point: HMRC looks at why the policy was taken out. Cover whose sole purpose is to protect trading income after the loss of a key person can qualify for tax relief; cover with a capital purpose — such as protecting share value or repaying long-term borrowing — is treated differently.
For a detailed worked explanation, see our Key Man Insurance Taxation guide.
HMRC’s current guidance is more useful than relying on old shorthand versions of the Anderson Principles.
Under HMRC BIM45525, Key Person Insurance premiums can be allowable where:
HMRC also looks at evidence of non-trading purposes. For example, BIM45530 specifically highlights policies on major shareholder-directors where one purpose may be protecting the value of their shares.
Where the premiums meet HMRC’s conditions and are deducted from trading profits, the claim proceeds are normally treated as trading income. Where the premiums are not deductible, claim proceeds are generally not taxed as trading income — although HMRC makes clear that the tax treatment of the receipt is a separate question of law.
HMRC’s current guidance also confirms that premiums on Key Person policies connected with loan finance are not treated as an allowable incidental cost of obtaining that finance. This is one reason the purpose of the policy needs to be documented clearly from the outset.
The Anderson Principles date back to 1944 and have influenced the tax treatment of Key Person Insurance for decades. Over time, the wording used by advisers has changed, but the underlying distinction remains the same: is the policy protecting the business’s trading income, or is it protecting capital?
That distinction explains why two apparently similar Key Person policies can have different tax outcomes. A policy designed to replace lost trading profit may satisfy HMRC’s conditions, while a policy intended to protect share value, fund a share purchase or repay borrowing is more likely to have a capital purpose.
Practical example: if a company insures a sales director because losing that person’s contribution would reduce trading profit while a replacement is recruited, the policy may fit HMRC’s trading-purpose test. If the same policy is primarily intended to protect the value of the director’s shareholding, HMRC may regard that as a non-trade purpose.
Last checked: September 2026 against HMRC BIM45525 and BIM45530.
