As a small business owner, it is crucial to be aware of the various insurance
policies available to protect your company's interests. One such insurance policy
is key man insurance, which safeguards businesses against the loss of a crucial
employee or director. This article will delve into key man insurance and explore
its tax implications for small businesses in the UK.
What is Key Man Insurance?
Key man insurance is a life or critical illness policy taken out by a business to
protect against the financial consequences of losing a vital employee or director,
known as a key person. The key person's knowledge, skills, or connections are
critical to the company's success, and their loss could significantly impact the
business. In such cases, key man insurance can provide financial compensation
to help the company recover and adjust.
Tax Implications of Key Man Insurance
When considering key man insurance, it's essential to understand its tax
implications, as they can affect both the premiums paid and the benefits
received by the business. Here, we outline the key tax considerations for small
businesses in the UK:
1. Premiums as allowable business expenses
In some cases, key man insurance premiums can be treated as an allowable
business expense, which can be deducted from the company's profits before
calculating corporation tax. To qualify for this tax treatment, the policy must
meet the following criteria, as set out by HMRC:
• The policy is a term assurance policy, meaning it only provides cover for a
• The purpose of the policy is to cover the loss of profits resulting from the
death or critical illness of the key person.
• The policy must not have any investment element, meaning it only
provides a payout in the event of the insured person's death or critical illness,
with no maturity or surrender value.
If the policy meets these requirements, the premiums will likely be considered an
allowable business expense. However, it's essential to consult with your
accountant or tax advisor to confirm this.
2. Benefit payouts and corporation tax
If the policy premiums are treated as an allowable business expense, the benefit
payout received by the business upon the death or critical illness of the key
person will typically be subject to corporation tax. This is because the payout is
considered a trading receipt, which is taxable as part of the company's profits.
3. Income tax and National Insurance Contributions (NICs)
Key man insurance policies taken out by a business on the life of an employee or
director do not usually result in any income tax or NIC liability for either the
employee or the company. However, if the policy's purpose is primarily to
provide a lump sum for the employee's family, rather than compensate the
business for the loss of profits, the premiums may be treated as a taxable
benefit-in-kind for the employee.
Understanding the tax implications of key man insurance is vital for small
business owners looking to protect their company from the loss of a key person.
While some tax advantages can be gained if the policy meets specific criteria, it's
essential to consult with a professional accountant or tax advisor to ensure
compliance with HMRC guidelines. With the right guidance, you can make an
informed decision and choose the best insurance policy to secure your business's