Is income protection insurance
tax deductible?

No. Income protection insurance for yourself is personal, because it protects your own income rather than the business (GOV.UK). The upside is that benefits paid out under a personal policy are usually tax-free. Business insurance, such as public liability or business interruption cover, is different and allowable.

For the self-employed, there is no sick pay, so income protection insurance is an important safety net. It is still personal: it replaces your income as an individual, so the premiums are paid from after-tax money. The good news is the other side of that rule: benefits you receive from a personal policy are generally free of Income Tax.

Is income protection insurance tax deductible?

The HMRC rule

A cost is only allowable if it is incurred wholly and exclusively for the business. Everyday living costs, health, appearance and leisure have a personal purpose, so they are not allowable even when they help you work. The rule comes from HMRC Business Income Manual BIM37007: wholly and exclusively, Legal and financial costs.

Only costs incurred wholly and exclusively for the business are allowable (expenses overview). A policy that protects your personal income serves a personal purpose. Business insurance, such as cover for business premises, stock or interruption to trade, is allowable (legal and financial costs).

When you can claim it

• Business interruption insurance protecting business profits.
• Group income protection for employees.
• Public liability, professional indemnity and other business insurance.
• Key person cover on an employee, in some circumstances.

When you cannot

• Your own income protection premiums.
• Personal accident or sickness cover for yourself.
• Mortgage payment protection for your home.
• Premiums for family members.

What to claim instead

Pay personal income protection from your own money. If you later claim, the benefits are generally tax-free, which is the trade-off for not getting relief on the premiums.

How to decide if you can claim it

1. Was it for the business? A cost is only allowable if you incur it wholly and exclusively for the business. If it also serves a personal purpose that cannot be separated, such as clothing that keeps you warm or a meal that keeps you going, HMRC disallows it.
2. Is part of it personal? Where a cost has a business part you can identify, such as the business calls on a phone bill or the business miles in a car, you claim that part and leave the rest out, on a reasonable basis you can explain.
3. Is it a running cost or something you keep? It is a running cost, so on the cash basis it counts when you pay it and on traditional accounting when you incur it. Nothing about it needs spreading over later years.
4. Is there a specific rule? For income protection insurance, the deciding rule is personal costs: a cost is only allowable if it is incurred wholly and exclusively for the business. Everyday living costs, health, appearance and leisure have a personal purpose, so they are not allowable even when they help you work.

Worked example: an electrician’s cover

An electrician pays £55 a month, £660 a year, for income protection and £380 for public liability insurance. The £380 is allowable. The £660 is personal, and if he is unable to work and the policy pays £2,000 a month, those payments are tax-free.

Why it is personal

Income protection replaces your personal income. It pays out to you, not the business, and it would help you whether or not the business continued. That personal purpose means the premium is not incurred wholly and exclusively for the business.

Tax-free benefits

Because the premiums get no relief, benefits from a personal income protection policy are generally exempt from Income Tax. If a policy were treated as a business cost, the benefits would be taxable business income instead.

Business interruption insurance

Business interruption cover pays the business for lost profits after an insured event, such as a fire at your premises. It protects the business itself, so premiums are allowable and pay-outs are business income.

Employees

Group income protection for employees is an allowable staff cost. Benefits paid to employees through payroll are taxable as their earnings in the normal way.

Paying from the business account

Sole traders often pay personal costs from the account they use for the business. That is allowed, but the payment is drawings, not an expense. Record it that way so it does not end up in your expense totals. If your accounts do include it, the full self-employment pages have a disallowable column, box 45 for other expenses, where the same amount is added back.

Choosing a policy

Income protection policies for the self-employed usually pay a monthly benefit after a waiting period, often four to thirteen weeks, based on your recent profits. Because premiums are paid from after-tax income, compare the net cost with the tax-free benefit, and check how the insurer calculates self-employed income.

Relevant life and executive policies

Company directors can sometimes have income protection paid by their company as a business expense, under an executive income protection policy. That route is not available to sole traders, who are not employees of their own business. It is one of the small differences between trading as a sole trader and through a limited company.

Where it goes

Personal income protection goes nowhere on the business pages. Business insurance goes in other business expenses, box 30, or premises costs, box 21.

Where it goes on your return and in MTD

Because it is not allowable, a sole trader leaves it out of expenses altogether. If it went through your business account, record it as drawings or a non-business payment, and if your accounts include it, add the same amount back in the disallowable column of the full self-employment pages.

If your turnover was under £90,000, you can use the short self-employment pages (SA103S), which ask for a single figure for total allowable expenses rather than a box-by-box breakdown, and the full pages let you give just a total in box 31 too. The category still matters for your own records and for Making Tax Digital, where each quarterly update uses the same categories unless you choose to send one consolidated figure.

Most sole traders now use the cash basis, the default from the 2024/25 tax year, which counts a cost when you pay it. On traditional accounting you count it when you incur it, and equipment you keep goes through capital allowances rather than expenses.

How much an allowable cost saves

The value of a deduction is the tax it removes from your profit, not the cost itself. At the basic rate a sole trader saves 26p for every pound of allowable expense, at the higher rate 42p, and in the personal allowance taper between £100,000 and £125,140 as much as 62p. Landlords pay no Class 4 on rental profit, so they save 20p or 40p.

What £1,000 of allowable expense saves a sole trader in 2026/27

• Basic rate (20% + 6%)£260
• Higher rate (40% + 2%)£420
• Additional rate (45% + 2%)£470
• Allowance taper band (60% + 2%)£620

Records to keep

You do not need business records for personal costs. If a personal payment was made from the business account, record it as drawings so it is excluded from your expenses. Keep policy documents, statements and receipts in your personal records, because some of them matter for your tax return in other ways.

From 6 April 2026, sole traders and landlords with qualifying income over £50,000 keep these records digitally and send quarterly updates under Making Tax Digital, falling to £30,000 from April 2027 and £20,000 from April 2028. The MTD requirement checker shows when it applies to you.

Common mistakes

• Claiming income protection premiums.
• Confusing income protection with business interruption cover.
• Declaring tax-free benefits as income.

Related expenses

This item sits in the other business expenses category, alongside art and collectibles, care home fees, charity donations, clothing and workwear, cryptocurrency, fines and penalties, funeral costs and furniture. The A to Z of expenses answers the same question for every other cost.

TapTax sorts each cost into the right category as you record it, applies the business share where you set one, and keeps the receipts with the figures, ready for your quarterly updates and final return.