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Directors’ tax guide
In principle yes, but for a qualifying policy the charge is cancelled out. HMRC treats directors’ and officers’ (D&O) cover that an employer arranges and pays for as a benefit under Chapter 10 of the benefits code, based on each person’s share of the premium. Section 346 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) then gives an equal deduction where the policy is a “qualifying insurance contract”, so there is normally no tax to pay. HMRC’s employer guidance says the cost is reported on form P11D, with no tax or National Insurance to deduct or pay.
Part of: D&O insurance explained
In short
Company-paid D&O insurance creates a benefit charge on the “proper proportion” of the premium for each director (HMRC manual EIM30501). Section 346 ITEPA 2003 gives a matching deduction for premiums under a qualifying insurance contract, which HMRC says offsets the charge. To qualify, a policy must only cover employment-related liabilities and costs and meet conditions on its term, extra benefits and connected contracts (section 349). HMRC says “mixed” policies that also cover other risks are excluded from relief. HMRC’s employer guidance says to report the cost on P11D, and HMRC’s National Insurance manual says no Class 1 contributions are due.
HMRC’s Employment Income Manual sets out the starting point at EIM30501. Where an employer “arranges and pays for insurance to cover potential liabilities arising to directors or employees from alleged or actual wrongful acts or omissions in their capacities as such, charges under Chapter 10 of the benefits code … arise in respect of the benefit of the insurance cover”.
The amount charged is the “proper proportion” of the premium: the part of the overall premium attributable to the cover for that director or employee. For the deduction, where a qualifying contract covers more than one person or risk, section 346(3)(b) ITEPA apportions the premium on a just and reasonable basis.
The company is allowed to buy this cover. Section 232 of the Companies Act 2006 restricts company indemnities for directors, but section 233 says this “does not prevent a company from purchasing and maintaining for a director of the company, or of an associated company, insurance against any such liability”.
Section 346 gives a deduction from employment earnings for:
HMRC says section 346 allows “deductions equal to and so offsetting the charges” that arise when an employer provides the cover or meets the liability (EIM30505). Because the deduction cancels the benefit charge, HMRC adds that “nothing is likely to turn on” how the premium is apportioned between people (EIM30519).
There are limits. The deduction is only available against earnings from the office or employment concerned. It is not allowed for a payment it would be unlawful for the employer to insure, or for payments under arrangements with tax avoidance as a main purpose. A liability counts if it is imposed for your acts or omissions as a director or employee (section 348), and HMRC says this includes liabilities arising from an out-of-court settlement (EIM30511).
Section 349 sets four conditions:
HMRC’s manual explains the effect of the first of these conditions: it excludes from relief “mixed policies; that is, policies that cover both qualifying and other liabilities”, because otherwise premiums would need a complex apportionment (EIM30513). If your D&O cover sits in a wider package with other covers, ask your broker exactly what the policy insures, and ask your accountant how HMRC would treat it.
HMRC’s employer guidance, Expenses and benefits: employee liabilities and indemnity insurance, says: “You must report on form P11D the total cost to you of the legal or insurance expenses for each employee. You don’t have to deduct or pay any tax or National Insurance.”
HMRC’s National Insurance Manual (NIM05665) says that where an employer meets a director’s or employee’s liability from legal action for alleged wrongful acts, or meets the cost of indemnity insurance, “no Class 1 NICs will be due”, and that “No Class 1A liability will arise if no tax charge exists”. Since 6 April 2016, this does not apply if the cost is met through a salary sacrifice arrangement, an unapproved scale rate or a round sum allowance.
If a director pays the premium personally, section 346 also gives a deduction: HMRC says it covers employees who “pay for or towards their own indemnity insurance” (EIM30505), and its guide 480 says a deduction is due for premiums on a policy taken out solely to cover these costs (480, chapter 7).
Where an employer meets a director’s liability itself, rather than through insurance, HMRC says the payment “will normally be chargeable on the director or employee as earnings” (EIM30501). Section 346 can give a matching deduction for qualifying liabilities and related costs, subject to the same limits.
Company law restricts what a company can pay. Section 232 of the Companies Act 2006 makes void any provision by which a company indemnifies a director against liability for negligence, default, breach of duty or breach of trust in relation to the company, except as allowed by section 233 (insurance), section 234 (qualifying third party indemnity) or section 235 (pension scheme indemnity). A qualifying third party indemnity under section 234 cannot cover a fine imposed in criminal proceedings, a penalty payable to a regulator, or the costs of defending criminal proceedings in which the director is convicted or civil proceedings brought by the company in which judgment is given against them.
Insurance has limits too. HMRC’s manual says indemnity insurance “cannot extend to fines or penalties for criminal acts” (EIM30501), and that no tax deduction is given for liabilities such as fines and penalties that cannot lawfully be insured (EIM30523). D&O cover is always subject to the policy terms, so do not assume a policy will pay a fine or penalty.
Relief can continue after a director leaves. Section 555 ITEPA 2003 gives a former employee a deduction from total income for uninsured employment-related liabilities they bear themselves that would have been deductible under section 346 had they stayed in the job. It also cancels charges on post-employment earnings where someone else bears the liability or provides cover under a qualifying insurance contract (EIM30530). The deduction applies to amounts paid after the employment ends and within six years of the end of the tax year in which it ended (EIM30534).
This page is about the director’s own tax position. How the company treats the premium for corporation tax is a separate question for its accountant. Apex arranges D&O insurance. Cover is always subject to the policy terms. See D&O insurance explained and management liability insurance.
In principle, yes. HMRC treats D&O cover provided by an employer as a benefit under Chapter 10 of the benefits code, based on the proper proportion of the premium for each person. For a qualifying insurance contract, section 346 ITEPA 2003 gives an equal deduction, so there is normally no tax to pay.
Not normally, if the policy is a qualifying insurance contract under section 349 ITEPA 2003, because HMRC says the section 346 deduction offsets the benefit charge. HMRC’s manual says relief is excluded for “mixed” policies that also cover other liabilities, so check with your accountant if your D&O is part of a wider package.
HMRC’s employer guidance says you must report on form P11D the total cost of the legal or insurance expenses for each employee, and that you do not have to deduct or pay any tax or National Insurance.
HMRC’s National Insurance Manual says no Class 1 contributions are due where an employer meets the cost of indemnity insurance, and that no Class 1A liability arises if no tax charge exists. Since 6 April 2016, this does not apply where the cost is met through salary sacrifice, an unapproved scale rate or a round sum allowance.
Do not assume it can. HMRC says indemnity insurance cannot extend to fines or penalties for criminal acts, and a qualifying third party indemnity from the company cannot cover criminal fines or regulatory penalties (Companies Act 2006, section 234). What a D&O policy covers is always subject to its terms.
The director can claim a deduction from their employment earnings for the premium under a qualifying insurance contract, to the extent it relates to employment-related liabilities and costs (section 346 ITEPA 2003). HMRC’s guide 480 says a deduction is due for premiums on a policy taken out solely to cover these costs.
Apex arranges D&O insurance for company directors. Tell us about the company and the board, and we’ll look for suitable cover. Any cover is subject to the insurer’s acceptance and the policy terms. Or call 0117 325 0027.
Get a quote Call 0117 325 0027Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not legal or tax advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.
