Is professional indemnity insurance tax deductible?
Yes, professional indemnity insurance is tax deductible.
Business insurance is considered an ‘allowable expense’ – an essential cost that helps to keep your business running smoothly, which you don't pay tax on. Therefore, when calculating your taxable profits for your tax return you can deduct business expenses from your income, such as professional indemnity cover.
Alongside various other forms of business insurance, allowable expenses also include travel costs, property costs, and legal and financial costs.
Make sure that you keep a complete record of your business expenses, including a copy of your business insurance policy documents, so that you have evidence to provide HMRC if they were to conduct a check.
When should I take out professional indemnity insurance?
On the assumption that your business needs PI insurance, that you offer advice or professional services for example, then you should consider buying a policy from the first day you start trading to cover any room for error from day one.
When buying a policy, one question you will be asked is from when you want the policy to run. If you have an existing PI policy in place, you should tell the new insurer the date that existing policy started – this becomes the “retroactive date”. The new policy will then start (the “inception date”) and work done before the inception date with the new insurer, all the way back to the retroactive date, will be included.
Can you backdate insurance?
If you didn’t initially choose to take out PI insurance, but later down the line realise the benefits for your business, it’s not too late to cover previous work done. When taking out your PI policy, you can ask for the policy to be backdated. The underwriter will want to be satisfied that you are not buying the policy with an ulterior motive – for example that if, after a few questions, it seems as if a claim may be coming your way.
But if they are satisfied it was really an oversight and (with hindsight) a mistake, you may be offered terms to cover work previously done, with an agreed retroactive date prior to the start date of your new policy – however, you should expect to pay for this. The insurer is taking on additional risk, so this is likely to be reflected in the premium.
So, yes retroactive date is a technical term for the industry, but one it’s important for small business owners to understand. Do you know how far back your PI policy covers you for work done? If the answer’s no, you may want to check your policy with your insurer for peace of mind.