Is life and critical illness insurance
tax deductible?

No. Life insurance and critical illness cover for yourself are personal: they protect you and your family, not the business (GOV.UK). A sole trader has no company to take out a relevant life policy. Key person insurance on an important employee can be different, depending on its purpose.

Life insurance and critical illness cover protect your family if the worst happens. They are important, but they are personal: the pay-out goes to you or your dependants, not the business. Company directors can sometimes use relevant life policies, but a sole trader has no company to pay for one.

Is life and critical illness 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). Life and critical illness cover for yourself serves a personal and family purpose.

When you can claim it

• Key person insurance on an important employee, where it protects business profits.
• Death-in-service benefits for employees, as staff costs.
• Business loan protection where required by a lender, in some cases.
• Business insurance generally.

When you cannot

• Life insurance for yourself.
• Critical illness cover for yourself.
• Mortgage life cover on your home.
• Cover for your partner or family.

What to claim instead

Pay personal life and critical illness cover from your own money. Writing a life policy in trust can keep the pay-out outside your estate for Inheritance Tax, which is often more valuable than any relief on the premiums would be.

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 life and critical illness 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: a builder’s cover

A builder pays £45 a month for life insurance and £30 a month for critical illness cover, £900 a year in total. None of it is allowable. The policies are written in trust for his family, so a pay-out would sit outside his estate.

Why it is personal

Life and critical illness cover protect you and your family. The benefit is personal, so the premiums are not incurred wholly and exclusively for the business, however much the business depends on you.

Key person insurance

A business that insures the life of a key employee to cover lost profits if they die or fall ill may be able to deduct the premiums, and pay-outs are then taxable business income. The policy must be for the business's benefit, usually short term, and not on the life of the owner.

Relevant life policies

Relevant life policies let a company pay for life cover for an employee or director. They are not available to sole traders, who are not employees of their own business.

Writing policies in trust

A life policy written in trust pays out to the beneficiaries directly, outside your estate, which can avoid Inheritance Tax and speed up payment. Ask the insurer about trust options when you take out cover.

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.

Business partners and shareholder protection

Partners in a business sometimes take out cover so the surviving partners can buy the share of one who dies. Premiums for such partnership protection are generally personal to each partner, not a business expense, and the proceeds are used to buy the share.

Mortgage and loan requirements

Lenders sometimes require life cover as a condition of a business loan. Even then, cover on your own life is generally personal, because the pay-out repays a debt you owe personally as a sole trader. Keep the loan's interest, not the insurance, in your business figures.

Where it goes

Personal life and critical illness premiums go nowhere on the business pages. Employee death-in-service and key person premiums, where allowable, go with staff or other business costs.

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 personal life cover as a business expense.
• Assuming a relevant life policy is available to a sole trader.
• Not writing a policy in trust.

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.