Employee liabilities and indemnity insurance

By Tolley in association with Philip Rutherford

The following Employment Tax guidance note by Tolley in association with Philip Rutherford provides comprehensive and up to date tax information covering:

  • Employee liabilities and indemnity insurance
  • Introduction
  • Employees’ liabilities
  • Relief
  • Policies covering multiple employees
  • Ex-employees
  • Reporting requirements


Employers will often meet the liabilities of their employees when they arise as a consequence of their role. To cover these liabilities an employer will often take out insurance.

Employees’ liabilities

Legal proceedings can be instigated against employees or directors either by other employees or by third parties. Often the legal costs and any resulting liabilities will be met by an employer. An employer may choose to purchase insurance to meet all such costs.

If an employer meets the liabilities of an employee or purchases insurance on his behalf, then typically a tax charge will arise under ITEPA 2003, s 62 (see the Contractual and pecuniary liabilities guidance note).

However, in some circumstances there may not be a charge to tax.


ITEPA 2003, ss 346–347 provide relief for the costs of liabilities and insurance costs whether incurred by an employer or by an employee. A deduction can be claimed in relation to:

  • the liabilities of the employment
  • costs and expenses associated with a liability
  • the amount of an insurance premium


This relief also extends to Class 1 NIC.

SI 2001/1004, reg 25, Sch 3, Part X, para 10

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