If you run your business as a sole trader, there is a good chance you have taken out some form of insurance.
In some trades, it is almost unavoidable. In others, it is simply sensible protection against the risks of dealing with customers, equipment, or professional advice.
Sooner or later, the same question tends to come up when preparing your accounts or completing a Self Assessment return.
Can the cost of those insurance premiums be claimed as a business expense?
In many situations, the answer is yes. But it depends on what the policy actually covers and whether it relates directly to the business.
The rule HMRC uses for business expenses
For a cost to be deductible, it must arise from running the business itself. This principle applies to all expenses claimed by the self-employed.
HMRC explains the rule in its Business Income Manual:
BIM37007 – Wholly and exclusively rule
The manual explains that expenditure must be incurred “wholly and exclusively for the purposes of the trade” in order to be allowed as a deduction.
In practical terms, this means the insurance must protect the business against risks created by its normal activities. If it does, the premiums are usually treated as a business expense when calculating taxable profit.
Common business insurance policies that are normally allowable
Several types of insurance commonly taken out by sole traders will usually qualify as deductible expenses.
Public liability insurance
Public liability insurance protects your business if a member of the public is injured or their property is damaged because of your work.
For example:
- a builder working inside a client’s home
- a gardener using machinery in a customer’s garden
- a trader operating a stall at a busy market
If something goes wrong and a claim is made, the policy may cover legal costs or compensation.
Because the insurance directly protects the business against risks created by its activities, the premiums are normally allowable.
More details can be found in our guide to public liability insurance.
Professional indemnity insurance
Professional indemnity insurance is commonly used by consultants, designers, freelancers and other professionals who provide advice or specialist services.
An IT consultant, marketing adviser or web designer could face a claim if a client believes their work caused financial loss. Professional indemnity insurance helps cover legal costs associated with those claims.
Because the policy protects the business from claims related to its services, the premiums are generally deductible.
See also: Professional indemnity insurance for sole traders
Employers’ liability insurance
If you employ staff, even casually or part-time, you will normally be required by law to hold employers’ liability insurance.
This cover protects the business if an employee becomes ill or injured as a result of their work.
Since the policy exists purely because the business employs staff, the premiums are treated as a normal business expense.
Employers’ liability insurance for sole traders
Cyber insurance
Cyber insurance has become more common among small businesses, particularly those that store client data or run online systems.
Policies typically cover incidents such as hacking, ransomware attacks or data breaches. If business systems are compromised, the policy may cover investigation costs, recovery services or legal advice.
Where the policy protects business data or systems, the premiums are usually treated as allowable expenses.
Cyber insurance for the self-employed
Which insurance premiums can sole traders claim?
| Insurance type | Usually allowable? | Why or why not? |
|---|---|---|
| Public liability insurance | ✅ Yes | Protects the business against injury or property damage claims from customers or the public |
| Professional indemnity insurance | ✅ Yes | Covers claims linked to professional advice or services provided by the business |
| Employers’ liability insurance | ✅ Yes | Required when employing staff and protects the business against employee injury claims |
| Cyber insurance | ✅ Yes | Protects business systems, client data and operational risks linked to cyber incidents |
| Income protection insurance | ❌ No | Replaces personal income rather than covering a business liability |
| Life insurance | ❌ No | Personal financial protection for family or dependants |
| Private health insurance | ❌ No | Provides medical cover for the individual rather than protecting the trade |
Public liability insurance
Usually allowable? ✅ Yes
Why or why not? Protects the business against injury or property damage claims from customers or the public
Professional indemnity insurance
Usually allowable? ✅ Yes
Why or why not? Covers claims linked to professional advice or services provided by the business
Employers’ liability insurance
Usually allowable? ✅ Yes
Why or why not? Required when employing staff and protects the business against employee injury claims
Cyber insurance
Usually allowable? ✅ Yes
Why or why not? Protects business systems and data from cyber incidents
Income protection insurance
Usually allowable? ❌ No
Why or why not? Replaces personal income rather than covering a business liability
Life insurance
Usually allowable? ❌ No
Why or why not? Personal financial protection for dependants
Private health insurance
Usually allowable? ❌ No
Why or why not? Benefits the individual rather than protecting the business
Insurance that usually counts as a personal expense
Some policies protect the individual rather than the business itself. These are normally treated differently for tax purposes.
Income protection insurance
Income protection policies provide a regular income if you are unable to work due to illness or injury.
Although these policies are often recommended for self-employed people who do not receive sick pay, the payments replace personal income rather than cover business liabilities.
Because of this, the premiums are usually treated as a personal cost rather than a business deduction.
Income protection insurance for sole traders
Life insurance
Standard life insurance policies that pay out to your family if you die are considered personal financial arrangements.
Even if the premiums are paid from your business account, they normally cannot be deducted when calculating your trading profit.
Private health insurance
Private medical insurance is also generally treated as a personal expense.
The cover benefits the individual rather than protecting the business from a liability or operational risk.
If you are considering this type of cover, see:
Private health cover for the self-employed
How do you record insurance expenses in your accounts
Allowable insurance premiums are normally recorded alongside other business expenses when preparing accounts or completing your Self Assessment return.
Most accounting software includes a category for insurance, although it may sometimes appear under “other allowable expenses”.
Keeping documentation such as policy schedules, invoices and renewal notices helps show what the insurance covers and why it relates to the business.
Limited companies are treated differently
The rules described here apply to sole traders.
For limited companies, the tax treatment of certain policies differs.
For example, some types of insurance that are not tax deductible for sole traders may be structured differently when arranged through a company, including relevant life insurance and executive income protection insurance.
If you have any questions about which expenses you can claim against your business profits, talk to an accountant.