Tax Treatment of Insurance: A Guide for Businesses and Individuals

At Black & White Accounting, we know that insurance is a crucial part of financial planning for both businesses and individuals. But what about the tax implications? Understanding the tax treatment of insurance can help you maximise deductions, remain compliant, and avoid unexpected liabilities. In this blog, we break down everything you need to know about insurance and tax in the UK.

Is Insurance Tax-Deductible?

The tax treatment of insurance premiums depends on the type of insurance and whether it’s taken out for business or personal purposes. Generally, business-related insurance policies can be deducted as an allowable expense, whereas personal insurance policies usually do not qualify for tax relief.

Business Insurance

For businesses, insurance premiums can be deducted as an allowable expense, provided they are wholly and exclusively for business purposes. Here are some common types of business insurance and their tax treatment:

• Employer’s Liability Insurance – A legal requirement for most businesses, this is tax-deductible.
• Public Liability Insurance – Protecting against claims from third parties, this is an allowable business expense.
• Professional Indemnity Insurance – A must-have for many professionals, including accountants and consultants, and fully tax-deductible.
• Property Insurance – Covering business premises, stock, and equipment, this is also tax-deductible.
• Key Person Insurance – This type of insurance protects businesses against financial loss caused by the death or illness of a crucial team member. However, HMRC may scrutinise its tax deductibility, depending on who benefits from the payout.

Personal Insurance

For individuals, most personal insurance premiums are not tax-deductible. This includes:

• Life Insurance – No tax relief on premiums, but beneficiaries may receive a tax-free lump sum.
• Health Insurance – No personal tax deduction, but employer-provided health insurance is considered a taxable benefit.
• Income Protection Insurance – No tax relief unless provided as part of a business expense for self-employed individuals.

Benefit-in-Kind (BIK) Implications

If a business pays for certain types of insurance policies for employees or directors, these may be considered a Benefit-in-Kind (BIK) and could be subject to tax and National Insurance Contributions (NICs). The implications include:

• Private Medical Insurance – If an employer pays for private health insurance, it is considered a BIK, and the employee must pay income tax on the value of the benefit. The employer must also pay Class 1A NICs.
• Life Insurance (Relevant Life Policies) – Generally, Relevant Life Policies (RLPs) are not considered a BIK and can be tax-efficient for businesses, as long as they meet certain conditions.
• Critical Illness Cover – If a company provides critical illness cover as a benefit, it is usually treated as a BIK and subject to tax.
• Income Protection Insurance – Employer-paid policies may also be classed as a BIK unless the payout is structured as part of a group scheme.

Employers must report BIKs through the P11D form or via payroll reporting, ensuring employees are taxed appropriately. Businesses should carefully assess the tax efficiency of offering insurance as an employee benefit.

What About Insurance Payouts?

The tax treatment of insurance payouts depends on the type of policy and who the beneficiary is:

• Business Insurance Payouts – Typically taxable if they replace lost income or cover business costs. However, some capital receipts may not be taxable.
• Life Insurance Payouts – Usually tax-free for beneficiaries, provided the policy is written in trust.
• Health & Income Protection Payouts – Payments may be tax-free for individuals but could be taxable for businesses.

Optimising Your Insurance for Tax Efficiency

Understanding the tax treatment of insurance allows businesses and individuals to make informed decisions. Here are some ways to optimise your tax position:

• Review Business Insurance Policies – Ensure all business-related insurance is correctly accounted for as a deductible expense.
• Use Trusts for Life Insurance – Placing life insurance policies in trust can help avoid inheritance tax.
• Consider Tax-Efficient Employee Benefits – Employer-paid health and life insurance policies may have tax advantages when structured correctly.

Final Thoughts

Insurance is a vital tool for risk management, but understanding its tax implications is equally important. At Black & White Accounting, we help businesses and individuals navigate complex tax issues with clarity and confidence.

Need expert advice on tax and insurance? Contact us today, and let’s ensure your financial protection is as tax-efficient as possible!