Why does the type of key person policy affect whether its premiums can be deducted?

HMRC’s Business Income Manual only allows a deduction where the sole purpose of the policy is meeting a loss of trading income and, for life cover, the policy is term insurance with no other benefits and a term no longer than the person’s period of usefulness to the company. Policies carrying an investment content, such as whole of life or endowment cover, count as capital expenditure instead and fail this test. This is why policy type, not just the business reason for buying it, decides deductibility.

If key person premiums are deductible, does that mean the eventual pay-out is tax-free?

No — these are mirror-image rules. Where premiums are allowable as a deduction, receipts under the policy are generally taxed as trading income, and where premiums are not allowable, receipts are generally not taxed in that way. HMRC is explicit that this cannot be guaranteed in every case, pointing to decided cases rather than a fixed formula, so the specific facts of a company’s arrangement need confirming with an accountant rather than assumed from the general pattern.

How does the tax treatment of death-in-service benefits differ from relevant life plans in law?

Death-in-service benefits rely on section 307 of ITEPA 2003, which keeps employer provision for a retirement or death benefit outside the residual benefit-in-kind charge. Relevant life plans rely on a different provision, section 393B, which treats benefits under a relevant life policy specifically as excluded benefits. Both routes avoid the same type of charge but through separate statutory mechanisms, which is why the correct provision needs matching to the correct product rather than assumed to be interchangeable.

Business and group protection

Tax treatment of business and group protection premiums and pay-outs

The short answer

There is no single rule. Key person premiums are deductible only if they pass HMRC’s sole-trade-purpose test, and where they do, the pay-out is generally taxed as trading income. Employer provision for death or retirement benefits sits outside the benefit-in-kind charge, and relevant life policy benefits are excluded benefits in law.

Written by Parvoz Haydarov. Reviewed by Ilana Eldad.

Published 15 September 2026. Last reviewed 15 September 2026. Next review due 15 December 2026.

What to know about the tax treatment of business and group protection

Key person premiums are deductible only where the sole purpose is meeting a loss of trading income. Read more
Where premiums are allowable, pay-outs are generally taxed as trading income. Read more
Employer provision for death or retirement benefits sits outside the benefit-in-kind charge. Read more
Relevant life policy benefits are treated as excluded benefits under section 393B. Read more

Thinking about the tax treatment of business and group protection

What works well

The main rules are published by HMRC and in statute.
A written accountant’s view can be kept with the policy.
Getting the purpose right at outset avoids later argument.

What to watch

A deduction on premiums usually means a taxable pay-out.
Product names do not determine treatment — purpose does.
Rates, thresholds and reporting rules change; nothing here is tax advice.

Four rules, and where each one comes from

The first rule is the key person purpose test. HMRC’s Business Income Manual allows a deduction for premiums only where the sole purpose is the trade purpose of meeting a loss of trading income rather than a capital loss, and — for life policies — the cover is term insurance with no other benefits and the term does not extend beyond the period of the employee’s usefulness to the company. Policies with an investment content are capital expenditure and fail. The second rule is the mirror image: where premiums are allowable, receipts under the policy are generally taxed as trading income; where they are not allowable, receipts are generally not taxed as trading income — though HMRC is explicit that no assurance can be given, citing decided cases. The third rule covers employee benefits: section 307 of ITEPA 2003 keeps employer provision for a retirement or death benefit outside the residual benefit-in-kind charge, which is the basis of death-in-service treatment. The fourth covers relevant life plans: section 393B treats benefits under a relevant life policy as excluded benefits. What none of these rules do is settle your own company’s position — that depends on the purpose, the ownership, the policy type and the facts.

Ask your accountant for a written view on each policy before it starts, covering deductibility of the premium, taxability of the pay-out and any reporting obligation, and keep it with the policy documents. Whatever the specifics of the tax treatment of business and group protection, the discipline that protects the business is always the same: record who owns the policy, who receives the money and which agreement directs it; get the insurer’s and the accountant’s position in writing; and review the arrangement whenever the people, the shareholdings or the borrowing change.

Related guides

What business protection is

Common questions

Why does the type of key person policy affect whether its premiums can be deducted?: HMRC’s Business Income Manual only allows a deduction where the sole purpose of the policy is meeting a loss of trading income and, for life cover, the policy is term insurance with no other benefits and a term no longer than the person’s period of usefulness to the company.^[1] Policies carrying an investment content, such as whole of life or endowment cover, count as capital expenditure instead and fail this test. This is why policy type, not just the business reason for buying it, decides deductibility.
If key person premiums are deductible, does that mean the eventual pay-out is tax-free?: No — these are mirror-image rules. Where premiums are allowable as a deduction, receipts under the policy are generally taxed as trading income, and where premiums are not allowable, receipts are generally not taxed in that way. HMRC is explicit that this cannot be guaranteed in every case, pointing to decided cases rather than a fixed formula, so the specific facts of a company’s arrangement need confirming with an accountant rather than assumed from the general pattern.
How does the tax treatment of death-in-service benefits differ from relevant life plans in law?: Death-in-service benefits rely on section 307 of ITEPA 2003, which keeps employer provision for a retirement or death benefit outside the residual benefit-in-kind charge.^[2] Relevant life plans rely on a different provision, section 393B, which treats benefits under a relevant life policy specifically as excluded benefits.^[3] Both routes avoid the same type of charge but through separate statutory mechanisms, which is why the correct provision needs matching to the correct product rather than assumed to be interchangeable.

Sources

HM Revenue & Customs. Business Income Manual BIM45525: key persons insurance. Accessed 15 September 2026 (primary source)
UK Parliament (legislation.gov.uk). Income Tax (Earnings and Pensions) Act 2003, section 307: death or retirement benefit provision. Enacted 6 March 2003 (primary source)
UK Parliament (legislation.gov.uk). Income Tax (Earnings and Pensions) Act 2003, section 393B: relevant benefits and relevant life policies. Enacted 6 March 2003 (primary source)