Professional indemnity (PI) insurance is one of the larger fixed costs a professional practice carries, and a common question is whether the premium can be set against taxable profits. The short answer, for most UK professionals, is yes — an annual PI premium taken out for the purposes of the trade or profession is a deductible revenue expense. This entry sets out the general position, the statutory basis, and how the deduction is claimed by different business structures. It is not tax advice; readers should confirm their own position with a qualified tax adviser.
For unincorporated businesses — sole traders, partnerships and LLPs — deductibility of expenses is governed by section 34 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). An expense is deductible if it is incurred wholly and exclusively for the purposes of the trade, profession or vocation. For companies, the equivalent provision is section 54 of the Corporation Tax Act 2009, which applies the same wholly-and-exclusively test. HMRC's Business Income Manual (BIM) contains the practical guidance, with the general treatment of insurance premiums discussed in the BIM45500 series.
The leading authority on the test is Vodafone Cellular Ltd v Shaw (HMIT) [1997] STC 734, in which the Court of Appeal confirmed that the test focuses on the taxpayer's object in incurring the expense rather than on any incidental non-business benefit. Because a PI policy is taken out to meet a business need — protecting the practice against claims arising from its professional services — the object is plainly commercial, and the premium sits within the deductible category.
A sole practitioner — say an architect running an unincorporated practice — deducts the PI premium against the profits of the trade under the general ITTOIA rules (historically referred to as Schedule D Case I or Case II). The premium goes into the profit-and-loss account as an insurance expense, reduces taxable profit, and flows through to the self-assessment return. A sole practitioner paying a £2,000 PI premium simply enters it as a business expense; the tax saving depends on the individual's marginal rate. The same treatment applies to an unincorporated accountant, engineer, consultant, IFA or IT contractor.
For a traditional partnership or a limited liability partnership, the PI premium is deducted at partnership level when computing taxable profit. The partnership return (SA800) shows the deduction; each partner or member then receives a share of the reduced profit, which is taxed on their personal self-assessment return.
Take a mid-sized solicitors' LLP that pays a £14,000 PI premium for the 2025 year. The full £14,000 is deducted against the LLP's taxable profit before profit shares are struck. Each member is then taxed via self-assessment on their share of the remaining profit. The treatment does not turn on whether the LLP pays the broker directly or reimburses a member — provided the policy is the firm's policy and covers the firm's professional work, the wholly-and-exclusively test is met.
Where the practice trades through a limited company, the PI premium is a corporation tax deduction under section 54 of the Corporation Tax Act 2009. The premium reduces the company's taxable profit for the accounting period in which it is incurred. Directors of small consultancies, IT contractors trading through personal service companies and incorporated accountancy or engineering firms all fall within this treatment.
An annual PI premium is a revenue expense — it buys cover for a defined period, typically twelve months, and confers no lasting asset on the business. It is not caught by the capital-expenditure prohibition in ITTOIA and CTA. Premiums paid in advance for cover extending beyond the accounting date should be apportioned so that the deduction falls in the correct period; this is a straightforward accruals point.
A PI premium paid for reasons that are not wholly and exclusively for the trade — for example, cover for private consultancy work carried out entirely outside the practice, or a personal indemnity taken by an individual in a non-trading capacity — will not qualify. Retired professionals paying run-off cover should consider the position carefully; where the run-off relates to the previous trade, HMRC has historically accepted the deduction, but the facts matter.
Insurance premiums are exempt from VAT. Instead, Insurance Premium Tax (IPT) at the standard rate applies to most general insurance premiums, including PI. IPT is not recoverable as input tax and forms part of the deductible cost of the premium. The broker's invoice will show the net premium and the IPT separately.
To support the deduction, keep the broker's invoice, the policy schedule, and evidence of payment. Allocate the expense to the correct accounting period; where a policy straddles a year-end, apportion on a time basis. A short note on file confirming that the policy covers the professional activities of the business is helpful if HMRC ever raises a query.
For sector-specific coverage of PI insurance for UK professions, see the Apex Insurance Brokers pillar guides for solicitors, architects, accountants, independent financial advisers, IT consultants, management consultants and engineers.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy. Apex Insurance Brokers Limited does not provide tax advice — consult a qualified tax adviser regarding your specific situation.