Keyman Insurance and Corporation Tax: Are Premiums Tax-Deductible? (UK 2026)

Whether keyman insurance premiums are deductible against corporation tax in the UK depends on three HMRC tests known as the “Anderson principles” (after Sir John Anderson’s 1944 statement to Parliament). Get them right and your premiums reduce your taxable profit; get them wrong and HMRC will treat the premiums as a non-deductible appropriation of profit and the payout as a taxable receipt anyway. Here is exactly how the rules work in 2026.

Quick facts: HMRC’s view on keyman insurance

• Statutory authority: ITTOIA 2005 / CTA 2009; HMRC manual references BIM45525 onwards.
• The “Anderson principles” come from Hansard, 14 June 1944.
• HMRC will assess deductibility on a policy-by-policy basis — getting it wrong is not penalised retrospectively, but you lose the deduction.
• Tax treatment of premiums and payout are linked: deductible premiums ↔ taxable payout, and vice versa.

The three Anderson tests for tax-deductibility

For a keyman insurance premium to be deductible against your company’s corporation tax, the policy must satisfy all three of the following:

What “wholly and exclusively” means in practice

Section 54 CTA 2009 only allows a deduction for expenditure incurred “wholly and exclusively for the purposes of the trade”. For keyman insurance, HMRC reads this as: the policy exists solely to put the company back in the trading position it would have been in had the key person not died or been incapacitated. If the policy serves any meaningful non-trading purpose (e.g. enabling the family to buy out the deceased’s shareholding), the premium falls outside section 54 and is non-deductible.

Are the premiums deductible if the cover is on a director-shareholder?

It depends on the size of the shareholding. HMRC’s test is whether the director’s loss is essentially a capital loss to the owners (in which case the policy is not “wholly for the trade” and premiums fail). In practice:

• Minority shareholding (typically <5%) and a genuine employment role: usually deductible.
• Significant shareholding (5–25%): grey area — usually requires a clear written purpose statement.
• Sole or majority shareholder: rarely deductible — HMRC normally treats the cover as protecting the owners’ capital interest, not the trade.

Is the keyman insurance payout taxable?

Generally yes — if the premiums were tax-deductible, the lump sum is taxable as trading receipt under CTA 2009. If the premiums were not deductible, the payout normally falls outside the charge to corporation tax. The two sides should match; if you find premiums were deductible but you are arguing the payout is not taxable (or vice versa), expect a hard conversation with HMRC.

Worked example 1 — deductible policy

Worked example 2 — non-deductible policy

What about VAT on keyman insurance?

Insurance premium tax (IPT) at 12% applies; VAT does not. Premiums quoted by UK insurers normally include IPT.

What you should do before buying

• Document who is being insured, their role and shareholding, in board minutes or a short policy memo.
• Document the basis for the sum assured (multiple of profit / loan exposure / contract value).
• Confirm the policy is term-only, no investment element.
• Speak to your accountant if any of the Anderson tests are borderline; for very large sums assured, ask in advance whether a clearance application to HMRC is appropriate.
• Run quotes via the whole-of-market keyman quote form — the broker can flag tax-edge structures.

Related guides

• What is keyman insurance?
• Keyman insurance policy explained
• Keyman insurance UK cost 2026
• Key person protection for limited companies

Frequently asked questions about keyman insurance and corporation tax

Are keyman insurance premiums always deductible against corporation tax?

No. They are deductible only if the policy meets all three Anderson tests — employee not shareholder, pure protection, sum assured wholly to compensate trading loss.

If the premium is deductible, is the payout always taxable?

Yes — in matching pairs. Deductible premiums lead to a taxable payout as trading income; non-deductible premiums normally lead to a non-taxable payout.

What if the company gets the deductibility wrong?

HMRC will normally disallow the deduction at enquiry and assess any back tax. Get it right at the start with documented reasoning to avoid surprises.

Is keyman insurance for shareholder-directors ever deductible?

Sometimes, for minor shareholders in a genuine employment role. For sole or majority shareholders it is usually treated as protecting the owners’ capital interest, not the trade, and is not deductible.

Does VAT apply to keyman insurance premiums?

No. Insurance Premium Tax (IPT) at 12% applies; VAT does not.

Where do I find HMRC’s published view?

Business Income Manual BIM45525 onwards covers keyman insurance and the Anderson principles in detail.

{“@context”:”https://schema.org”,”@type”:”FAQPage”,”mainEntity”:[
{“@type”:”Question”,”name”:”Are keyman insurance premiums always deductible against corporation tax?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:”No. They are deductible only if the policy meets all three HMRC Anderson tests — employee not shareholder, pure protection only, sum assured wholly to compensate trading loss.”}},
{“@type”:”Question”,”name”:”If the keyman premium is deductible, is the payout always taxable?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:”Yes, in matching pairs. Deductible premiums lead to a taxable payout as trading income; non-deductible premiums normally lead to a non-taxable payout.”}},
{“@type”:”Question”,”name”:”What if the company gets keyman tax deductibility wrong?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:”HMRC will normally disallow the deduction at enquiry and assess any back tax. Get it right at the start with documented reasoning to avoid surprises.”}},
{“@type”:”Question”,”name”:”Is keyman insurance for shareholder-directors deductible?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:”Sometimes, for minor shareholders in a genuine employment role. For sole or majority shareholders it is usually treated as protecting the owners’ capital interest, not the trade, and is not deductible.”}},
{“@type”:”Question”,”name”:”Does VAT apply to keyman insurance premiums?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:”No. Insurance Premium Tax (IPT) at 12% applies; VAT does not.”}},
{“@type”:”Question”,”name”:”Where do I find HMRCs published view on keyman insurance tax?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:”Business Income Manual BIM45525 onwards covers keyman insurance and the Anderson principles in detail.”}}
]}