If you run your own limited company, you’ll know you’re responsible for protecting yourself if you’re unable to work in the future.
An executive income protection policy can provide peace of mind and tax efficiency, as the premiums can typically be funded by your limited company.
You might also want to compare this with life insurance for directors, which offers different tax advantages.
In this article, we explain what income protection is and how your limited company can fund the costs.
What is income protection?
This type of policy protects your income if you can’t do your usual work because of an injury or illness.
It is a worthwhile addition to Statutory Sick Pay, which all employees are entitled to. Unfortunately, SSP is a mere £118.75 per week (as of May 2025) and is paid by your employer (your limited company) for up to 28 weeks.
Of course, this level of income replacement is unlikely to be enough for most company directors.
This is where income protection comes in.
What does this type of policy cover?
Income protection pays you an income when you can’t work because of sickness or disability.
For contractors, income protection can be especially valuable, as there is rarely any other safety net in place.
You will continue to receive payments until you recover, retire, or your claim period expires—whichever happens first.
IP cover will typically exclude some pre-existing conditions, self-harm, or illness which results from the misuse of alcohol or other substances.
You will be able to choose the type of cover the policy includes – the most common choices are:
- Level cover – the amount of protection remains the same throughout the term, with no inflationary increases.
- Inflation-linked cover – as the name suggests, the amount of cover will increase annually, according to inflation times a multiple.
You can choose how quickly your policy comes into play, as well as the policy term – often until retirement.
Personal vs. Limited Company – how are the premiums taxed?
If you are a traditional employee or sole trader, you pay for costs like life insurance or income protection out of your post-tax personal income.
However, if you run your own limited company, the business can access protection products, such as relevant life insurance and income protection cover, funded by the company itself.
As certain products can be offset against your company’s Corporation Tax, this is tax-efficient for the company.
From the director’s perspective, the company owns and pays for the policy, so no benefit-in-kind charge arises. This means there are no Employer or Employee National Insurance liabilities, and no personal income tax to pay on the premiums.
How are any payouts taxed?
The limited company is the policyholder for executive plans, and an employee is the person insured.
The company will receive any income from the policy upon a successful claim. Importantly, this income is treated as trading income and is taxed upon distribution.
For personal cover, you have already paid premiums from post-tax income, so any payouts are not taxed further.
Clearly, there is a tax benefit to setting up income protection through your company rather than paying for it personally; however, you should ask your financial adviser or accountant for a comprehensive illustration tailored to your personal circumstances.
How much protection can I take out?
Executive protection policies typically cover up to 80% of your income (a combination of salary and dividends, plus possibly overtime and the value of any P11d benefits).
This compares favourably to personal plans, which typically cover only up to 65% of your income.
However, the proceeds of a successful executive policy claim are taxable, whereas those from a personally funded policy are not.
Some leading providers can protect up to £25,000 per month for level cover, and more if the cover is inflation-linked.
You may also be able to include the value of your spouse’s dividends, although conditions will apply, such as that your spouse performs only minimal administrative duties.
You need to choose your deferred period, which is the time before the policy starts paying out. This can typically range from 7 days to a year. For obvious reasons, the longer the deferred period, the lower your premiums will be.
Things to consider when taking out cover
- When working out how much cover you need, it is worth ‘grossing up’ the potential payout the company would receive in the event of a successful claim. You can then work out the amount you (the employee) will receive after tax.
- Ensure that your cover is provided on an own occupation basis.
- Consider the deferred period carefully and how long you would like the cover to run, as these variables can significantly affect the premium.
- In the current climate, it may be sensible to consider inflation-linked cover!
- Make sure you approach an IFA that specialises in the needs of limited company owners. They will understand the intricacies of how directors operate in practice, as well as how premiums and payouts are taxed.
Directors may also want to read our guide to income protection for the self-employed, which covers how these policies work outside of a limited company structure.
More on income protection
For more information, visit our dedicated Income Protection Help website. You’ll find practical guides to executive income protection for company directors, along with the option to request a personalised quote.