A sole trader can deduct premiums for insurance taken out for the business, such as professional indemnity, public liability, employers’ liability, premises, stock and business interruption cover. Premiums for cover on your own life, health or income are not allowable, because they protect you rather than the trade, and policies with mixed use are allowed only for the business share. How the premium is treated usually decides how any payout is taxed.

What test decides whether a premium is deductible?

There is no special list of allowable policies. The ordinary rule in section 34 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) applies: no deduction is allowed for expenses not incurred wholly and exclusively for the purposes of the trade, although an identifiable business proportion of a mixed expense can be deducted. HMRC’s Business Income Manual opens its insurance chapter (BIM45500) by saying that deductibility depends on what is insured and whether the insurance was taken out for the purposes of the trade.

GOV.UK’s guidance for the self employed says you can claim for any insurance policy for your business, giving public liability insurance as an example, and lists professional indemnity insurance premiums among allowable legal and financial costs. The question to ask about each policy is simple: who or what does it protect, and why was it bought?

Which business covers are allowable?

Cover Treatment HMRC guidance
Professional indemnity Allowable BIM45515
Public liability Allowable GOV.UK self employed expenses
Employers’ liability and cover against compensation to staff Allowable BIM45525
Buildings, contents, plant and other fixed assets, including new for old Allowable BIM45501
Business interruption and loss of profits Allowable BIM45510
Indemnity for employees sued for acts in their job Allowable BIM45520
Locum and fixed overheads cover during your illness Allowable BIM45565
Life, accident or sickness cover on yourself or a partner Not allowable BIM45560

Two smaller points follow from the same guidance. BIM45501 confirms that annual premiums on fixed assets are allowed in full even where the policy pays out on a new for old basis. BIM45595 confirms that where a premium is deductible, the Insurance Premium Tax charged on it is deductible too; see Insurance Premium Tax. Insurance on business premises and contents also appears on GOV.UK’s list of allowable property costs.

Why are your own life, health and income covers not allowed?

BIM45560 states that premiums paid by a sole trader or partner for life, accident or sickness cover for themselves or a partner are not allowable in computing trading profits. These are often called permanent health or income protection policies. The cover is personal: it replaces your income or provides for your family, and protecting the person who owns the business is not the same as incurring an expense of the trade. The benefits from such a policy are not trading income and are generally tax free under section 735 of ITTOIA.

The line can be fine. BIM45565 contrasts these personal policies with cover that pays the business’s own costs while you are ill, such as a locum’s fees or fixed overheads. That cover is allowable because the costs it meets would themselves be allowable, and the payouts are taxable trading receipts. If a policy mixes the two, for example by also paying for medical treatment, the premium may need to be split so that only the overheads element is deducted.

Key person cover is different again. An employer can deduct premiums on a policy covering loss of profits if an employee or other key person dies or falls ill, provided the sole purpose is to meet a loss of trading income and, for life cover, it is term insurance with no investment element (BIM45525). Premiums on whole of life or endowment policies are capital, and an endowment policy taken out as a condition of a business loan is not treated as an incidental cost of the finance, so it is not deductible either.

What about policies used partly for private purposes?

Some premiums cover the business and your private life at the same time. GOV.UK’s rule is that if you use something for both business and personal reasons you can claim only the business costs. Typical examples are:

  • car insurance on a vehicle you also drive privately, split on business mileage;
  • home insurance where you work from home, where GOV.UK allows only the part used for business;
  • a single policy that bundles business cover with personal cover, which needs an apportionment.

If you use simplified expenses for a vehicle, the flat mileage rate replaces the actual running costs, and GOV.UK names insurance among them, so the vehicle’s insurance cannot also be claimed. If you use the £1,000 trading allowance instead of expenses, no premiums are deductible at all.

Is fee protection or tax investigation insurance deductible?

HMRC takes a specific view here at BIM46452. A premium insuring against extra professional costs is allowable only if those costs would themselves have been allowable. Accountancy fees for negotiating additional tax after an enquiry finds careless or deliberate inaccuracies are not allowable, so where a policy covers those fees among other risks, the whole premium is disallowed. HMRC says it cannot be apportioned and stays disallowed even if no claim is made. Whether a particular policy covers those costs depends on its wording; how such cover works is explained in what is tax fee protection insurance.

How are insurance payouts taxed?

BIM45500 sets out the general symmetry: if the premiums are allowable, the receipts are normally taxable as trading income, and where no deduction was allowed the receipts are often not taxable. In practice:

  • a professional indemnity claim works by allowing the damages you pay as a deduction and taxing the insurer’s reimbursement as a trading receipt, so the two cancel out (BIM45515);
  • receipts from a key person policy whose premiums were allowable are trading income under section 106 of ITTOIA (BIM45525);
  • payouts from a locum or fixed overheads policy are trading receipts (BIM45565);
  • benefits under your own income protection policy are not trading income (BIM45560).

What about cover after you stop trading?

Professionals who close a business often keep paying for run off cover against claims about past work. With no trade left, there are no profits to deduct it from. Sections 96 and 97 of the Income Tax Act 2007 provide post cessation trade relief instead: insurance against liabilities from claims that work, goods or services were defective, or against the legal costs of such claims, is a qualifying payment. If paid within seven years of cessation, it is deducted from your total income for the year of payment (BIM90100 and BIM90110). See post cessation receipts and expenses.

How does this work in practice, and what goes wrong?

Illustration only. A self employed architect pays these premiums in the year:

Policy Premium Allowable
Professional indemnity £2,400 £2,400
Public liability £300 £300
Office contents £200 £200
Car insurance, 60% business use £900 £540
Personal income protection £720 Nil
Term life cover for her family £360 Nil
Total £4,880 £3,440

She adds back £1,440. If she later claims on the income protection policy, the benefit is not part of her trading profit.

Common errors are deducting personal life or income protection premiums because they are paid from the business account, claiming full car insurance on a car also used privately, claiming insurance on top of the mileage flat rate, and assuming that every policy sold to businesses is automatically allowable. For the wider framework, see the wholly and exclusively rule and allowable business expenses.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.