Income protection for the self-employed and contractors pays a tax-free monthly income if illness or injury stops you working — replacing the sick pay safety net employed staff get from their employer. Insurers use net profit, dividend income, or contracted day rates to calculate insurable earnings.
Why Self-Employed Need It Most
Employed staff have:
- Statutory Sick Pay (£116.75/week from day 4, up to 28 weeks)
- Often contractual sick pay (1–6 months full pay)
- Death-in-service benefits
Self-employed have none of this. SSP isn't payable to you. If you can't work, money stops on day one. Yet only around 11% of UK self-employed have income protection — versus mortgage rates of around 4-5% in the same demographic.
How Insurers Calculate Your Insurable Income
Different setups, different rules:
- Sole trader — net profit (revenue minus business expenses) over the last 12 months. Most recent SA302 / tax return used at claim.
- Limited company director — usually salary + dividends combined. Some insurers also include retained company profits where you can prove income flexibility.
- Contractor (PSC / umbrella) — daily rate × billable days, often validated by recent contracts.
- Partnership / LLP — share of partnership profit per the partnership agreement.
Most insurers cap benefit at 50–60% of declared income.
Executive Income Protection — Director-Specific
Limited company directors can take Executive Income Protection (EIP), where:
- Premiums are paid by the company
- Premiums are usually tax-deductible as a business expense
- No P11D / benefit-in-kind charge to the director (unlike personal cover paid by company)
- Claim payments go to the company, then to the director as taxed income
- Can cover up to 80% of remuneration including dividends in some cases — higher than personal IP caps
For a higher-earning director, this can be 30–40% cheaper net of tax than personal cover. Discuss with your accountant and a protection adviser together.
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Deferred Period — Why 4 or 8 Weeks Wins
Without sick pay, every week without income digs into savings or pushes you toward credit cards. Most self-employed clients we set up choose:
- 4-week deferred — most expensive, but cover starts 1 month after illness
- 8-week deferred — typical balance of cost vs cover
- 13-week deferred — only if you have substantial cash savings to bridge 3 months
A useful test: how many months of essential outgoings can your savings cover? Set the deferred period one month shorter than that.
Own Occupation Is Non-Negotiable
For tradespeople, hairdressers, photographers, IT contractors and similar — your skills are highly specific. "Any occupation" or "activities of daily living" definitions are nearly worthless.
Always insist on own occupation. LV=, Royal London, The Exeter, Vitality and Aviva all offer it. See our monthly budget guide for how to size it correctly to cover the mortgage and bills.
Setting It Up
- Gather your last 1–3 years' SA302 / accounts
- Decide personal vs Executive cover (limited company directors only)
- Set deferred period based on cash buffer
- Choose own occupation
- Compare 4–5 specialist insurers — premium variation can be 30%+
- Pair with critical illness cover for lump sum on serious diagnosis
Free protection review — we'll handle the medical, business and tax angles.
Frequently Asked Questions
- Can I get cover if I've only been self-employed 6 months?
- Most insurers want 12 months of trading. A few accept 6 months with strong evidence (contracts, invoices, accountant letter). LV= and Holloway-style mutuals can be more flexible.
- What if my income varies a lot year to year?
- Insurers usually average the last 1–3 years. At claim, recent earnings are checked — if income has dropped, payout may be capped to current earnings.
- Are CIS-registered subcontractors classed as self-employed?
- Yes — for cover purposes. Income evidenced via SA302 or CIS deduction statements.
- Will mortgage lenders accept my income protection?
- It doesn't directly affect your mortgage application, but having cover often improves overall affordability assessment indirectly. See our <Link to='/blog/self-employed-mortgages'>self-employed mortgage guide</Link>.
- What if I have multiple income streams?
- Most insurers will combine declared streams up to the benefit cap, provided you can evidence them at claim.
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