Most limited companies and self-employed people have some type of insurance cover in place. In this article, we look at which business insurance expenses can be legitimately claimed against your firm’s profits.
As with all types of business expense, you can claim for the cost of insurance policies if you can show that cover is required purely for business purposes. A life insurance policy, for example, would not be tax deductible as it doesn’t serve a purely business purpose. On the other hand, a policy which covers against injuries to employees is clearly a valid business expense.
Standard Business Insurances
The most popular types of business insurance such as public liability, employers liability, legal expenses, tax investigation, and professional indemnity insurance are all legitimate business expenses, and attract no benefit in kind charges.
Other types of business insurance include motor insurance, office buildings and contents cover, business disruption, and equipment cover.
Key Man Insurance
Traditionally this type of cover would insure a company against a loss in profits should a key team member or director die.
Even if the proceeds of any claim are paid to the company, if the ‘key man’ is a substantial shareholder, then the cover may not be tax deductible, as the benefits would pass to the family of the diseased, providing a personal benefit as well as a business one.
There is a new breed of keyman policy called ‘relevant life’ that uses a specific trust to help SMEs provide tax efficient death in service for employees including directors. With this plan premiums are an allowable expense, there are no benefit in kind considerations for the employee and most importantly of all, in the event of a claim the proceeds are tax free too.
There are limits to the cover allowed which are based on earnings but relevant life can be a far more tax efficient way of protecting the loved ones of an entrepreneur than mainstream keyman policies.
You should talk to a professional advisor if you are considering taking out any type of key man policy, as both the company and the recipients of any insurance payout could be taxed if you don’t take care when setting up the policy.
Permanent Health Insurance
Income protection covers you in the event that you are unable to work. Unlike traditional employees, business owners are responsible for protecting themselves financially if they fall ill.
You can pay for a Permanent Health Insurance (PHI) policy via your limited company, or out of your own income.
Although PHI contributions to a business scheme are allowable against tax, if you claim against a business PHI policy, you will have to pay income tax and potentially also National Insurance Contributions on the payments.
On the other hand, if you fund an income protection policy personally, your contributions will be made out of post-tax income, but any funds you subsequently receive as a result of a claim would not be taxable.
It is worthwhile discussing benefit levels and tax implications with a professional adviser before committing to a policy.
Thanks to Tony Harris from Contractor Financials, a leading IFA, for his contributions to this article.