Is Professional Indemnity Insurance Tax-Deductible?

Professional indemnity insurance (PII) is a safeguard for your business, and, as tax season approaches, you might be wondering: is professional indemnity insurance tax deductible? The short answer is yes – PI insurance is generally tax-deductible as a business expense in the UK.

The long answer is that it depends on your business structure and how you claim these costs.

Let’s explore how PII fits into your tax strategy, the difference between a deductible expense and a policy excess, and how to make sure you’re claiming it correctly.

PI insurance protects your practice if a client claims you’ve made a mistake that’s caused them financial loss. For accountants, this might cover scenarios such as:

• Negligent advice: Incorrect guidance that leads to client financial loss
• Calculation errors: Mistakes in tax returns, accounts, or financial planning
• Breach of confidentiality: Accidental disclosure of sensitive client information
• Document loss: Missing or damaged client records in your care.

When something goes wrong, and in professional services, mistakes can happen, whether it’s a miscalculation, a missed deadline, or an allegation of negligence, PII covers the legal costs and compensation associated with defending your reputation and putting things right. Most professional bodies, including the ICAEW and ACCA, require a minimum level of professional indemnity insurance cover. Beyond regulatory compliance, PI insurance demonstrates professionalism and provides clients with confidence in your services.

Is Professional Indemnity Insurance Tax Deductible?

Yes, PII premiums are tax-deductible business expenses in the UK. HMRC treats PI insurance as a legitimate cost of running your professional practice, which means you can deduct the cost of your policy from your taxable profits, reducing the amount of income or corporation tax you owe. Why is it deductible? Because PII is considered “wholly and exclusively” for the purpose of running your business – the key test HMRC uses when determining whether an expense qualifies for relief.

It’s a necessary, legitimate cost directly tied to the operation of your practice, and professional bodies require it for regulatory compliance. This applies whether you operate as a sole trader, a partnership, or a limited company. The mechanics may differ slightly, but the principle is the same: if the policy protects your business’s income-generating activities, it’s tax-deductible.

What Does It Mean for an Expense to Be Tax-Deductible?

When an expense is tax-deductible, it means you can subtract it from your total income before calculating your tax bill. For example, if your total income is £60,000 and you claim £1,200 in allowable business expenses (including PI insurance), your taxable income becomes £58,800, lowering the amount of tax you pay. So, when you claim PII premiums as a deduction, you’re effectively reducing your tax liability.

This is different from a tax credit, which directly reduces the amount of tax owed. Deductible expenses lower your profits, which in turn lowers your tax bill. The exact saving depends on your business structure. Sole traders and partnerships pay income tax and National Insurance on profits, while limited companies pay corporation tax.

How to Claim Professional Indemnity Insurance on Your Tax Return

As with any expense, you need to keep accurate records of your PI insurance payments. That means keeping your insurance invoice, policy documents, and payment confirmations on file. You’ll need this information when completing your Self Assessment or Corporation Tax return. The process for claiming PII varies depending on your business structure.

For sole traders

Include the cost of your PI insurance premiums under “business expenses” in your annual Self-Assessment tax return. Record the full amount paid during the tax year, ensuring you have proper documentation, including policy documents and payment receipts.

For partnerships

The partnership tax return (SA800) should list insurance expenses, with each partner’s share of the reduced profits reflected in their individual returns.

For limited companies

Limited companies can claim PII premiums as a business expense in their annual accounts and CT600 corporation tax return.

Remember, you can only deduct premiums actually paid during the accounting period. If you pay annually in advance, the full amount is deductible in the year of payment. For monthly premiums, deduct only the months falling within your accounting period.

Is There a Deductible for Professional Indemnity?

This is another commonly asked question. The deductible (or excess) is the amount you agree to pay toward any claim before your insurer covers the rest. This excess amount is separate from your premium and represents your financial contribution to each claim. For example, if your policy has a £500 excess and a client claim results in £5,000 in legal costs, you’d pay the first £500, and the insurer would cover the remaining £4,500.

This deductible isn’t tax-deductible in advance – it’s only considered an expense if a claim occurs and you actually pay it. In that case, it may be possible to claim it as a business expense, depending on the nature of the claim and how it relates to your work. Most practitioners focus on the premium deductibility since excess payments only arise when claims are made.

Tax Planning Tips for Professional Indemnity Insurance

To ensure you get the full tax benefit of your PI insurance policy:

• Keep all receipts and policy documents for your records.
• Pay annually where possible — it simplifies reporting and often results in a lower premium.
• Work with a qualified accountant or tax adviser to ensure compliance with HMRC rules.

Speak to a tax professional for personalised advice

While PII is usually tax-deductible, your situation may have nuances. Factors such as mixed-use policies, international coverage, or unique business structures may affect how you claim deductions. If you’re unsure whether your policy or expenses qualify, ICPA members can access our tax advice lines for specialist support from our industry experts. Our tax advisors understand the nuances of professional practice and can provide guidance that’s tailored to your personal situation.

Professional Indemnity Coverage for Accountants

If you’re looking for professional indemnity insurance that’s built for accountants, ICPA offers  Professional Indemnity Insurance for Accountants as part of our Pro and Premium membership tiers. The policy is designed specifically for UK accounting professionals and underwritten by AXA, a leading A-rated insurer. Pro members receive £300,000 coverage, and Premium members benefit from £500,000 protection. All policies are ICAEW-compliant and can be increased to £1 million if that’s something you require.

Beyond PI insurance, ICPA membership gives you access to technical support, professional development resources, and expert guidance on tax matters affecting your practice and your clients. It’s all the support you need to run a successful and tax-efficient accounting practice.