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posted on November 16, 2020
Since professional indemnity insurance is an allowable cost, it goes against your business profits and therefore, it is tax deductible. It is used ‘wholly and exclusively’ in the course of your business and therefore can be claimed every year whether you are a sole trader or a limited company.
‘Allowable cost’ means it is an essential cost that keeps your business running smoothly, so you don’t have to pay tax on it (as is the case with all other forms of business insurance, travel costs, property costs, legal retainers and financial costs).
Bear in mind that professional indemnity insurance – tax deductible – is not a benefit to you personally but to your business, though you will gain some peace of mind from knowing that you are covered.
Over the years I have spoken to hundreds of people who are just starting their own business and their first question is usually whether or not they should be a sole trader or a limited company. And, of course, one of the advantages of trading through a company is the limited liability that it offers. Sometimes though, enough protection can be gained by taking out relatively inexpensive insurance, in particular professional indemnity insurance. There are many other reasons for making the decision about whether to be self-employed or set up a limited company which we covered in an earlier blog post.
But whether you are employed or self-employed you may well need professional indemnity insurance. If you offer advice or professional services for example, you should consider getting a policy from the start to ensure that you are covered for any mistakes. Failure to do so could prove expensive if you make a mistake that costs the client and they decide to reclaim the cost from you.
If you have determined the need for your business to be insured for professional indemnity, you should consider getting a policy that covers you from the day you started trading, whether it is as a sole trader or a limited company. This date is called the ‘inception date’.
If you didn’t initially choose to take out professional indemnity insurance, but later down the line you realise the benefit to your business, it’s not too late to cover the previous work that you have done. When taking out your professional indemnity insurance policy, you can ask for the policy to be backdated. The relevant underwriter will need to be satisfied that you are not already in a position where a claim may be made against you.
If they determine it was an oversight and a mistake on your part, you may be offered terms to cover the work you have done previously, with an agreed ‘retroactive date’ prior to the start date of your new policy. This is likely to cost you extra because the insurance company is taking on additional risk so do not be surprised to see it reflected in your premium.
Point to note: If you already have a policy, do you know how far back it covers you for work done? If the answer is no or you are uncertain, you should check your policy with your insurance company representatives for that additional peace of mind.
Make sure you shop around as prices can vary. If you want to learn more about what professional indemnity insurance is, how it protects you, whether it is applicable to your profession, how much it should cost, what kind of professional indemnity cover to go for and things like the differences between professional indemnity insurance and public liability insurance, here is a very helpful guide by Direct Line for Business on professional indemnity insurance.
Hi, I'm Ian Marlow, Managing Director Let's discuss your business's allowable costs