Executive income protection for limited company directors
Executive income protection helps your limited company continue paying you if illness or injury prevents you from working.
The policy is owned and funded by the company. If you make a successful claim, the monthly benefit is paid to the business, which can then use the funds to maintain your income.
Premiums may qualify as an allowable business expense, and they are not normally treated as a benefit-in-kind.
Executive income protection does not cover redundancy, the loss of a contract or a lack of available work.
Why limited company directors choose executive income protection
If you run your own company, your earnings will often depend on your ability to continue working. There may be no employer sick-pay arrangement beyond what your company can afford to provide.
Executive income protection is designed to help address this risk.
- Company-funded premiums: The policy premiums are paid directly by your limited company rather than from your personal, post-tax income.
- Potential Corporation Tax relief: Premiums may be deductible when calculating the company’s taxable profits, provided the policy is arranged correctly and meets the relevant conditions.
- No benefit-in-kind in most cases: The premiums are not normally treated as a taxable benefit for the insured director or employee.
- Cover for salary and dividends: Depending on the insurer and policy terms, cover may be based on both your PAYE salary and dividend income.
- Flexible policy options: You can select a deferred period, benefit level and payment term that reflect your income and financial commitments.
- Continued financial support: A successful claim can help the company maintain payments to you while you are unable to carry out your occupation.
How executive income protection works
Unlike a personal income protection policy, an executive policy is taken out by your limited company.
The company pays the premiums and is normally the recipient of any claim payments. If you are unable to work due to an eligible illness or injury, the insurer pays a monthly benefit to the business after the chosen deferred period ends.
The company can then use the proceeds to continue paying you through its normal payroll or distribution arrangements.
The precise tax treatment will depend on how the policy is structured and how the claim proceeds are used. See our guide to executive income protection tax for more information.
How do you set up an executive income protection policy?
- Calculate the income you want to protect: Review your salary, dividends and regular financial commitments. Our guide to how much income protection you may need explains what to consider.
- Choose a deferred period: This is the period between becoming unable to work and the start of claim payments. A longer deferred period will normally reduce the premium, but you will need enough savings or company funds to cover the gap.
- Select the benefit term: You may be able to choose short-term cover, which pays for a fixed period, or long-term cover, which can continue until you recover or reach the policy end date.
- Compare policies: Complete our executive income protection quote form. Our FCA-regulated partner, Broadbench Ltd, can compare suitable policies and explain the available options.
- Complete the application: The insurer will assess your occupation, income, health and lifestyle. Once accepted, the policy is established in the company’s name and the premiums are paid from the business account.
What can an executive policy cover?
Executive income protection can usually cover a proportion of the income you received before becoming unable to work.
Depending on the insurer, this may include:
- Your PAYE salary.
- Dividend income linked to your work for the company.
- Employer National Insurance contributions.
- Employer pension contributions.
- Certain benefits provided through the company.
Insurers apply their own limits and methods when calculating cover. Some will assess dividends differently, particularly where company profits fluctuate or where dividends are shared with another shareholder.
Executive income protection and personal income protection
Executive and personal income protection both provide financial support if illness or injury prevents you from working, but the ownership and tax treatment differ.
With executive income protection:
- The limited company owns the policy.
- The company pays the premiums.
- Premiums may qualify for Corporation Tax relief.
- The claim benefit is paid to the company.
- The company then uses the proceeds to maintain your income.
With personal income protection:
- You own the policy personally.
- You pay the premiums from your post-tax income.
- There is no Corporation Tax deduction for the premiums.
- Any successful claim is normally paid directly to you.
For many limited company directors, executive cover offers a practical way to protect salary and dividends without paying premiums personally. However, the most suitable structure will depend on your income, company finances and preferred method of receiving claim payments.
Common questions
Is executive income protection tax deductible?
Premiums paid by a limited company may be treated as an allowable business expense, provided the policy is arranged for a genuine business purpose and satisfies the relevant tax rules.
This can reduce the company’s taxable profits and, in turn, its Corporation Tax liability. Tax treatment is not automatic, so the policy should be reviewed by your accountant or adviser.
Is executive income protection a benefit-in-kind?
Where the company owns the policy and receives any claim benefit, the premiums are not normally treated as a benefit-in-kind for the insured director or employee.
This means there is generally no personal Income Tax or employee National Insurance charge on the premiums. The exact treatment depends on how the policy has been arranged.
Can executive income protection cover dividends?
Many executive policies can take account of both salary and dividends when calculating the available benefit.
The insurer may ask for company accounts, tax returns or other evidence showing that the dividends are supported by the company’s trading profits. Cover limits and evidence requirements vary between providers.
How are executive income protection claims taxed?
A successful claim is normally paid to the limited company and treated as business income.
The company can then use the money to continue paying the insured director or employee. Salary payments remain subject to PAYE and National Insurance, while dividends are taxed under the normal dividend rules.
How much cover can a director take out?
Executive policies may cover a substantial proportion of your pre-incapacity income, including salary and eligible dividends, subject to the insurer’s maximum limits.
The amount you can insure will depend on your earnings, occupation, company history and the provider’s calculation method.
Does executive income protection cover losing a contract?
No. Executive income protection pays where illness or injury prevents you from working and you meet the policy’s definition of incapacity.
It does not cover redundancy, contract termination, business failure, gaps between assignments or a general reduction in available work.
Can a one-person limited company take out executive income protection?
Yes. Executive income protection is commonly used by directors of small and one-person limited companies.
The director must normally be an employee of the company, and the available level of cover will be based on provable income and the insurer’s underwriting requirements.
What if I am a sole trader?
A sole trader cannot usually arrange executive income protection because there is no separate limited company to own and fund the policy.
Sole traders generally use personal income protection instead, with premiums paid personally and claim payments normally made directly to the policyholder.
Compare executive income protection policies
The cost and terms of executive income protection vary according to your age, health, occupation, income, deferred period and required benefit term.
Our FCA-regulated partner, Broadbench Ltd, can compare available policies and explain how different insurers treat salary, dividends and company-funded benefits.