Self-employed income protection – cover if you’re sick or injured

When you’re employed, there’s usually a safety net. If you’re unwell, you may be entitled to sick pay.

You’ll also have holiday pay and employer pension contributions.

Those benefits stop the moment you become self-employed. If you can’t work, the income stops as well.

Income protection insurance is designed to fill that gap.

It provides a regular income if illness or injury keeps you from working, so you can cover essential costs and give yourself time to recover.

Contents

• Who this guide is for
• What income protection covers
• Occupation classes explained
• How much cover you can take out
• Types of policy and premiums
• The deferred period
• Short-term and long-term cover
• Example claim
• Who should consider cover
• Other points to know
• Get a quote
• FAQs

Who this guide is for

This guide is written for sole traders and business partners who want to arrange income protection personally, paying premiums from post-tax income.

If you run a limited company, there may be other tax-efficient ways to arrange cover. See our income protection guide for directors.

What income protection covers

Income protection pays you a monthly income if you cannot work because of illness or injury. The payout is usually based on your taxable profits, not turnover.

Most policies replace 50% to 65% of earnings, with some allowing up to 70%. The aim is to provide enough to cover living costs without creating a situation where you are better off claiming than working.

You can choose between short-term and long-term cover. Short-term policies typically cover a limited period, often ranging from 1 to 12 months. Long-term cover can continue until you return to work, retire, or pass away, depending on the policy terms.

Other related products

• Payment protection insurance – covers loan or credit card repayments.
• Mortgage protection insurance – covers mortgage payments.
• Loan protection insurance – linked to specific loans.
• Unemployment insurance – limited cover if you are out of work.

Sole traders do not qualify for Statutory Sick Pay. State benefits such as Employment and Support Allowance or Universal Credit may be available, but support is limited.

Occupation classes explained

Policies are usually based on your “occupation class”:

• Own occupation – pays if you cannot do your actual job.
• Suited occupation – pays if you cannot do your job or a similar one that matches your skills.
• Any occupation – only pays if you cannot do any work at all.

“Own occupation” offers the broadest protection, but is usually the most expensive.

How much cover can you take out?

You cannot insure 100% of your income. Most insurers cover between half and two-thirds of average profits, with some going up to 70%. Many also apply an annual cap, which can be below £20,000 on some policies.

If your income varies, check whether it is averaged over one year or three when calculating the benefit.

Types of policy and premiums

• Guaranteed premiums – fixed for the life of the policy. Often cost more at the start but are better value later on.
• Reviewable premiums – reviewed each year. Start cheaper but usually increase with age and claims experience.
• Age-related premiums – rise automatically with age. The scale of increases is set out in advance.

The deferred period

The deferred period is the gap between stopping work and the first payout. Typical options are 4, 13, 26 or 52 weeks. A shorter wait means higher premiums. If you have savings, a longer deferral can reduce the cost.

Some insurers offer a split deferred period. For example, part of the benefit may start after four weeks, with the balance payable after 13 weeks. Accident claims may also trigger earlier payments than illness claims.

Short-term and long-term cover

Short-term cover usually pays for up to 12 months. Long-term cover can continue until you recover or reach the policy end date, often retirement. Longer cover costs more but provides greater security.

Example claim

Here’s how a typical claim might look for a self-employed designer earning £40,000 profit a year:

• Cover set at two-thirds of income pays around £26,000 per year, or just over £2,100 a month.
• With a 13-week deferred period, payments commence three months after the individual stops working.
• A short-term plan would pay for up to 12 months. A long-term plan could continue until recovery or retirement.

Short-term vs long-term cover

Who should consider cover

• Sole traders and freelancers with no sick pay.
• Households that rely on a single primary income.
• Anyone with a mortgage or regular rent payments.
• Families where savings would not last long.
• Trades and physical jobs with a higher risk of injury.

Other points to know

• Payouts are often reduced if you also receive state benefits, though these are limited for the self-employed.
• Some policies add extras such as retraining support or lump sums for terminal illness.
• The Association of British Insurers explains more about how income protection works here.

FAQs

Is income protection a tax-deductible expense for sole traders?
No. If you take out the policy in your own name and pay the premiums with personal income, they are not tax-deductible.

Are payouts taxed?
If you pay the premiums personally, benefits are usually tax-free. If a company pays benefits, they are normally taxable as income.

What’s the difference between income protection and critical illness cover?
Income protection pays a monthly income while you cannot work. Critical illness cover pays a lump sum if you are diagnosed with one of the specified conditions.

What’s the shortest deferred period?
Some insurers offer day-one or one-week coverage, although this is typically expensive. Four weeks is more common.

What if I return to work part-time?
Many policies include proportionate benefits, so payouts reduce in line with your reduced income.

Do insurers cover pre-existing conditions?
They will ask about your medical history. Depending on your answers, they may exclude a condition, apply a waiting period, or charge more.

Does income protection cover redundancy?
Not usually. Standard policies cover illness or injury. Some specialist plans add unemployment cover, but these are harder to find.

What if you’re a director of a limited company?

If you’re a director trading through a company, see our separate guide on arranging cover through the business for possible tax advantages: income protection for directors.