Income protection for contractors and freelancers

Contractors and freelancers often lack the financial safety nets that employees enjoy. You only earn while you’re working, so a prolonged illness or injury could quickly erode your savings and disrupt your business. For anyone whose income depends directly on their ability to work, income protection is a key part of a sound financial plan.

Company-funded or personal?

If you operate through your own limited company, you can usually take out an executive income protection policy. This type of plan allows the business to pay the premiums, which are normally treated as an allowable expense for Corporation Tax purposes. In return, the policy can replace up to 70–80% of your gross contract income (including dividends) if you’re unable to work due to illness or injury. The benefit is paid to the company, which can continue paying your salary or dividends while you recover.

If you contract through an umbrella company or trade as a sole trader, executive cover isn’t available because there’s no employer-employee structure. In these cases, a personal income protection policy is more suitable. You pay the premiums personally from post-tax income, and any claim payout is made directly to you on a tax-free basis. Personal policies typically cover around 55–65% of your usual income, depending on the insurer and your occupation class.

Factors affecting the premium

Several factors influence how much you’ll pay for income protection, including:

Level of cover: The higher the percentage of income you insure, the higher your premium. Executive policies can cover up to around 70–80%, while personal plans are usually capped at about 60%.
Deferred period: This is the waiting period before benefits start — for example, 1, 4, 13, or 26 weeks. Longer deferred periods reduce premiums but require stronger cash reserves or savings to cover that time.
Benefit term: You can choose between short-term cover (typically 12 or 24 months) or long-term cover that pays until retirement if you’re permanently unable to work.
Age and health: Premiums rise with age, and pre-existing medical conditions may either increase the cost or be excluded from cover.
Lifestyle factors: Smokers often pay nearly double the premium of non-smokers. Drinking habits and high-risk activities can also affect pricing.
Occupation class: Insurers group jobs by risk level — so IT contractors and consultants usually enjoy lower rates than manual or site-based professionals.
Hobbies and pastimes: Activities like rock climbing, diving, or motorsport can increase your premium or trigger exclusions.

Because contractors’ income often fluctuates between contracts, look for a policy that lets you review or adjust your insured benefit as your income changes. This flexibility helps ensure your cover remains suitable over time and prevents you from being underinsured or paying for more than you need.

It’s also worth speaking to a specialist adviser familiar with contracting arrangements and IR35. They can help you select a policy that aligns with your business setup, income pattern, and preferred tax structure — whether through your company or as a self-employed professional. To explore options from leading insurers, you can get a quote online or discuss cover with a regulated financial adviser.