What is a professional indemnity insurance expense for tax?
Answered 17 March 2026
Here is a comprehensive answer on professional indemnity insurance (PII) as a tax expense, covering both the trading/self-employment context and the employment context.
Professional Indemnity Insurance as a Tax Expense
What the law says
For traders and self-employed persons (including companies):
Where a deduction is allowed for a loss or expense in calculating the profits of a trade, and a person recovers a sum under an insurance policy or contract of indemnity in respect of that loss or expense, and the sum is not of a revenue nature, the sum must be brought into account as a receipt in calculating the profits of the trade (but only up to the amount of the deduction). This applies to individuals under ITTOIA 2005 s.106 and to companies under CTA 2009 s.103.
For employees:
Under ITEPA 2003 s.346, a deduction from earnings is allowed for:
- Payment of a premium under a qualifying insurance contract, but only to the extent that the premium relates to provision for the employee to be indemnified against a qualifying liability related to the employment, or for the payment of costs/expenses in connection with a claim or proceedings relating to such a liability.
No deduction is allowed where the payment is made pursuant to arrangements whose main purpose (or one of the main purposes) is the avoidance of tax.
Where an employee has left the employment, a deduction under s.346 is not available for payments made after the day of cessation — instead, relief may be available under s.555 ITEPA 2003.
HMRC guidance / practice
For traders and self-employed persons:
HMRC confirms that premiums on an indemnity policy providing cover for professional negligence are allowable as a deduction.
However, any damages paid as a result of professional negligence are not an allowable deduction to the extent that they are recoverable under an indemnity policy. The mechanism is: a deduction is allowed for the payment of damages, but the sums subsequently recovered under the indemnity policy are treated as trading receipts.
Where a capital sum is recovered under an insurance policy or indemnity contract in respect of a loss or expense for which a deduction had already been made, that capital sum must be included as a receipt in calculating taxable profits (but only up to the amount of the deduction).
For employees:
HMRC confirms that employee liabilities and indemnity insurance premiums deductible under ss.346–347 ITEPA 2003 are an allowable deduction from employment income, and that no formal claim is required — the deduction is made automatically by operation of law.
Deductions under s.346 are available only against earnings of the office or employment concerned.
In summary: Professional indemnity insurance premiums are an allowable tax deduction — for traders/self-employed persons as a trading expense, and for employees under the specific statutory relief in ITEPA 2003 s.346. Where a claim is subsequently paid out under the policy, the recovery is brought back into account as a trading receipt (for traders), ensuring the net tax position reflects only the uninsured element.
Citation sources
Part 5 Employment income: deductions allowed from earnings Chapter 2 Deductions for employee’s expenses Employee liabilities and indemnity insurance Payments made after leaving the employment 347 1 A deduction for a payment is not allowed under section 346 if— a the employee has ceased to hold the employment, and b the payment is made after the day on which the employee ceased to hold the employment. 2 If subsection (1) applies, see section 555 (former employee entitled to deduction in calculati
Part 3 Trading income Chapter 6 Trade profits: receipts Other receipts Sums recovered under insurance policies etc 103 1 This section applies if— a a deduction has been made for a loss or expense in calculating the profits of a trade, b a company carrying on the trade recovers a sum under an insurance policy or a contract of indemnity in respect of the loss or expense, and c the sum is not of a revenue nature. 2 The sum is brought into account as a receipt in calculating the profits of the trade
Part 2 Trading income Chapter 6 Trade profits: receipts Proceeds of insurance etc. Sums recovered under insurance policies etc. 106 1 This section applies if— a a deduction is allowed for a loss or expense in calculating the profits of a trade, b a person carrying on the trade recovers a sum under an insurance policy or a contract of indemnity in respect of the loss or expense, and c the sum is not of a revenue nature. 2 The sum is brought into account as a receipt in calculating the profits of
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Part 5 Employment income: deductions allowed from earnings Chapter 2 Deductions for employee’s expenses Employee liabilities and indemnity insurance Deduction for employee liabilities and expenses 346 1 A deduction from earnings from an employment is allowed for any or all of the following— A. Payment in or towards the discharge of a liability related to the employment. B. Payment of any costs or expenses incurred in connection with— a a claim that the employee is subject to a liability related
Premiums on an indemnity policy providing cover for professional negligence are allowable as a deduction. However, any damages, etc. paid as a result of professional negligence are not an allowable deduction to the extent that they are recoverable under an indemnity policy. This result is achieved by allowing a deduction for the payment of damages but then treating the sums recovered under the indemnity policy as trading receipts (see BIM40751).
Section 346 ITEPA 2003 allows for: deductions equal to and so offsetting the charges outlined at EIM30501 in respect of qualifying liabilities (see EIM30511) and similar deductions for employees who bear all or part of their qualifying liabilities or pay for or towards their own indemnity insurance. Deductions under Section 346 are available only against earnings of the office or employment concerned. No deduction is allowed for a payment that would otherwise meet the conditions of section 346 i