What is Keyman Insurance?

Keyman Insurance, often called Key Person Insurance, provides protection in the event a key employee dies or is diagnosed with a terminal or critical illness. Similarly to other types of life insurance policies, Keyman Insurance pays out a cash lump sum in the event of the person's death, in this case to the business that's taken out the policy. Crucially, as we'll explain in this guide, that cash lump sum must be used to mitigate the effect of losing that employee and not for other purposes in order to be tax-deductible.


Keyman Insurance taxation is a complicated topic for which there isn't a one size fits all rule. The information contained within this guide will generally be correct for most businesses, however, if there is any doubt, you should always check with your local tax office or accountant.

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What is HMRC's view of Keyman Insurance?

How HMRC taxes Keyman Insurance is far from straightforward, with the main principles behind their policy being based upon a set of 1944 guidelines laid out by the then Chancellor of the Exchequer Sir John Anderson. In reply to a question raised in the House of Commons, Sir John stated:

“Treatment for taxation purposes would depend on the facts of the particular case and it rests with the assessing authorities and the Commissioners on appeal if necessary, to determine the liability by reference to these facts. I am, however, advised that the general practice in dealing with insurances by employers on the lives of employees is to treat the premiums as admissible deductions, and any sums received under a policy as trading receipts, if 1. the sole relationship is that of employer and employee, 2. the insurance is intended to meet loss of profits resulting from the loss of services of the employee, and 3. it is an annual or short-term insurance. Cases of premiums paid by companies to insure the lives of directors are dealt with on similar lines. I am advised that it may be taken as a general rule that if the premiums are not admissible deductions the policy moneys do not constitute taxable receipts. For technical reasons, however, it is not possible to give an assurance which could cover every type of case.”

Still, confused? Don't worry, let's break that down.

What are Anderson Rules?

Based on Sir John's statement, known as the Anderson Rules, premiums will be tax-deductible as long as all of the following are true:

  • The relationship between the two parties is purely that of employer and employee.
  • The policy is there to meet the loss of profits arising from the death of the employee and not to compensate for the loss of goodwill or even to repay a loan.
  • The policy is short-term, which is generally understood as 5 years in duration, although it's believed longer-term policies are now permissible too, as long as the term does not exceed the expected duration of employment..
  • The sum assured is reasonable and correlates to the loss of profits associated with replacing that employee.

So, in short, as long as your company is taking out the policy on an employee's life, the payout is set at a reasonable level, the policy is short-term and the benefit is purely to cover loss of profits, then the premiums should be tax-deductible.

Finally, probably the most significant part of HMRC's guidelines is whether the policy is "wholly and exclusively" for the benefit of the business. If it is, then premiums will benefit from corporation tax relief, if it's not then no relief will be applicable.

How is keyman insurance taxed?
Premiums for Keyman Insurance are usually tax-deductible

Tax treatment based on the assured

Let's now look at how both the premiums and the benefit will be taxed, based on the individual whose life is being insured.

Taxation when protecting an employee

As we mentioned earlier in this article, as long as the sole relationship is that of an employer and employee, then premiums will generally be a tax-deductible business expense which will be eligible for corporation tax relief. That being said, the benefit (payout) will usually be taxable as it will be seen as a trading receipt. To ensure that you still receive enough funds to meet your needs, we'd typically suggest grossing up the payout, so that the net figure you receive after tax is sufficient.

Taxation when protecting a shareholder

Things get a little more complicated with shareholders as protecting the life of one can be seen as providing benefit to people other than the business. As the cash lump sum isn't "wholly and exclusively" for the purpose of the company's trade, premiums will usually be ineligible for corporation tax relief.

Things are a little greyer for minority shareholders and for those having very few shares in the business so you may be able to negotiate with HMRC on a case-by-case basis.

Similarly to that of employees, payouts on policies which cover shareholders usually count as trading receipts which means HMRC will also tax the payouts. If for instance, you are thinking of getting a policy which covers a director who has a 25% share in the business, it's likely the policy premiums and the payout will be subject to taxation.

Tax when covering a business loan

Lenders can often require a business to take out a Keyman Insurance policy to protect them against the death of a key employee. In that circumstance, where the policy is taken out to protect a loan, it won't be "wholly and exclusively" to the benefit of the business, it'll also benefit the lender. As such, the premiums in these cases will be taxable and ineligible for Corporation Tax relief.

However, as the payout is not solely for the benefit of the business but for a 3rd party lender, the cash lump sum will typically not be classed as a tax receipt and won't be subject to taxation. So where a policy is taken out for the purposes of protecting a loan, there is no need to "gross-up" the benefit, which ultimately means lower premiums.

HMRC Resources relating to Keyman Insurance

As we explained at the start of this guide, if you're unsure about taxation in relation to Keyman Insurance it’s always best to speak to your local tax office or your accountant. If you would like to look into it yourself in more detail, we'd recommend reading HMRC's Business Income Manual, sections BIM45525 and BIM45530, both of which have some useful information. Of course, you're also more than welcome to contact us and we'll do our best to answer any questions you may have.

Who are Business Protection Hub?

We're a specialist in Business Protection Insurance, working with small and medium-sized companies around the UK, helping them to decipher this often complicated area of insurance. Our specialism spans several popular business-only products including; Keyman Insurance, Relevant Life Insurance, Executive Income Protection and Shareholder Protection.