Most businesses pay for insurance in one or two large instalments for a policy that runs for a year. The cost belongs to the months the cover protects, not the month the invoice arrives, so insurance is one of the most common sources of prepayments.
Choosing the accounts
A single “Insurance” overhead account is enough for a very small business. As soon as the policies differ in purpose, split them:
| Account | Typical policies |
|---|---|
| Insurance – general business | public liability, employers’ liability, property and contents, business interruption |
| Insurance – professional | professional indemnity, directors’ and officers’ cover, cyber |
| Motor insurance | company vehicles (often within motor expenses) |
| Staff insurance benefits | private medical, group life, income protection |
| Insurance prepayments | current asset for unexpired cover |
Staff insurance kept separate makes the benefit-in-kind review easier: private medical insurance for an employee is normally a taxable benefit, while some group life schemes are not.
Insurance premium tax is a cost, not VAT
Insurance is exempt from VAT, so a policy invoice carries no reclaimable VAT. What it does carry is insurance premium tax (IPT). IPT cannot be reclaimed on the VAT return; post it to the same expense account as the premium. Do not code it to input VAT just because it appears on the invoice as a tax line.
Spreading an annual premium
A company with a 31 December year end pays a £3,600 combined policy on 1 October for cover to 30 September.
| Account | Debit | Credit |
|---|---|---|
| Insurance prepayments | £3,600 | |
| Bank | £3,600 |
Each month £300 is released:
| Account | Debit | Credit |
|---|---|---|
| Insurance – general business | £300 | |
| Insurance prepayments | £300 |
At 31 December three months have been charged (£900) and £2,700 remains as a prepayment. If the policy is paid by monthly direct debit with a broker’s finance agreement, the interest element of that agreement is a finance cost, not insurance.
When a claim pays out
Record the expected recovery only when it is virtually certain, normally when the insurer has accepted the claim. Until then, the loss is recognised and the claim at most disclosed. Credit the recovery against the cost it compensates (repairs, stock written off) or to “Insurance claims received” if that is clearer, and set up a receivable until the insurer pays. Where a damaged fixed asset is replaced, the write-off of the old asset and the proceeds are calculated separately; see fixed assets in the chart of accounts.
Policies that need a closer look
- Key person insurance can be deductible when it is a short-term policy that protects trading profits against the loss of an employee, in which case any payout is taxable; if the purpose is capital, or the insured person is a significant shareholder, the premiums are usually not deductible. Agree the treatment with your accountant before the first premium.
- Employers’ liability insurance is a legal requirement for most employers, so check it is renewed.
For what each type of cover does, see the guides on public liability insurance and professional indemnity insurance; the mechanics of releasing prepayments are covered in accruals and prepayments.