Getting a Tax Deduction for your Insurance Costs
Insurance can come in many forms. Most businesses will have the inevitable general insurances to pay such as public liability and employers liability. However, in addition there are insurances such as loss of key personnel (Keyman Insurance); loss of income (Income Protection Insurance) and professional negligence (Professional Indemnity Insurance).
I want to have a look at each of these and consider what is the best way of ensuring you get a tax deduction for your insurance costs.
1. General insurance
Any type of general insurance, such as public liability and employers liability insurance will be fully tax deductible against your profits. This is because they are completely for business purposes.
The only time a general insurance would have a problem getting a tax deduction would be where there was a private element to the insurance.
Example:- if you had business contents insurance for an office, but that policy covered some personal pictures you kept on the walls there would be a personal element to the insurance. In a limited company this would give rise to a benefit-in-kind
Tax warning:- for unincorporated businesses where a general insurance includes both personal and business elements, which cannot be distinguished, the insurance will fail the wholly and exclusively test and will not be deductible!
Tax Tip:- Do not mix up personal and business insurances. If this is impractical - when you get the quote from the insurance company make sure that they break down the premiums between business assets and personal assets. That way the premiums will be distinguishable. Make sure your Company only pays for the business assets element of the premiums to avoid a benefit-in-kind.
2. Keyman insurance
Whether a tax deduction is due for the cost of the premiums is dependent on our old friend, the rule of wholly and exclusively.
Keyman insurance premiums will be wholly and exclusively for business purposes where the business is the beneficiary of any pay-out made from the policy. The pay-out will be taxable income for the business.
If it's the proprietor or owner/director that receives the pay-out then the situation is not quite so simple. For an unincorporated business the premiums would not be tax deductible and the pay-out would be taxable on the owner. For a Limited Company, it depends on what type of policy has been taken out. If the policy protects the value of the shares then it is for the benefit of the shareholders. As such the premiums will not be tax deductible and could be treated as a dividend payment to the shareholders. However, if the policy protects the director then the premiums will be tax deductible for the Company but the Director will suffer a benefit-in-kind on the value of the premiums.
Tax Tip: the lowest cost tax option is clearly to have the business as the beneficiary of any pay-outs. However, to work out what would be most tax-efficient would require you to work out the relative tax position of the Company and the owners. You will probably need to speak to your accountant in order to calculate this.
3. Income/profit protection insurance
Once again we need to consider the rule of wholly and exclusively. And all we need say is that provided the policy is to protect the business from loss of income then the premiums will be tax deductible.
Tax Tip:- Care will need to be taken for an unincorporated business to make sure that the individual is not protected from loss of income within the business if they are unable to work. Make sure your insurance provider is aware of this when setting up the policy.
4. Professional indemnity insurance
There will be no problem getting a tax deduction for professional indemnity insurance because you only incur the premiums to protect your business.
Tax Tip:- where you are required to maintain your professional indemnity insurance but your employer does not reimburse you for this cost, you can claim a tax deduction for it through your PAYE coding or self-assessment tax return. If your employer does reimburse you for this costs there will be no benefit-in-kind to report.
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