Key Person Insurance Tax Calculator

Key person insurance is a life or critical illness policy taken out by a company on the life of an employee or director whose death or serious illness would significantly impact the business. The company pays the premiums and receives the policy proceeds.

HMRC's approach (outlined in BIM45525-45535) is a purpose test: if the insurance is to protect against lost trading profits (trading purpose), premiums are CT-deductible and proceeds are taxable income. If the insurance protects capital (e.g., covers a loan), premiums are not deductible and proceeds are not taxable.

Trading purposes include: covering the cost of recruiting and training a replacement, covering lost profits during the search period, protecting against the loss of a key sales person's revenue. The policy must not be permanent, must be short-term term assurance, and the key person must not have a substantial shareholding.

If the policy is on an employee's life (not a director), the premium may be a taxable benefit in kind reported on P11D. However, if the employer is the sole beneficiary and the policy protects business interests (not the employee/family), there is generally no BIK.

The company receives the tax-free or taxable proceeds depending on the policy purpose. If the proceeds are taxable (trading purpose), they are treated as trading income in the year received and subject to corporation tax. The company then uses the net-of-tax proceeds to fund the cost of replacement or cover lost profits.

Yes — once received, the proceeds belong to the company and can be used for any business purpose: paying debts, funding recruitment, compensating shareholders. However, if the proceeds are used for shareholder benefit (e.g., paying dividends), this does not change the tax treatment of the proceeds themselves.

If the key person has a substantial equity interest (typically more than 5% of the company), HMRC is more likely to view the insurance as protecting a capital interest rather than a trading activity. This can disqualify the CT deduction on premiums. Policies on minority-shareholding employees are safer from a CT perspective.

Key person insurance protects the business from the financial impact of losing a key employee/director. Shareholder protection enables surviving shareholders to buy out a deceased shareholder's shares. Shareholder protection is generally a capital policy — premiums not CT-deductible, proceeds not taxable. They serve different purposes and should be structured separately.