Income protection for limited company contractors
If you’re a contractor, your income usually depends on your ability to keep working. A lengthy illness or injury could leave you without regular earnings while many of your financial commitments continue.
The right type of income protection depends largely on how you operate. Contractors working through their own limited company can usually consider executive income protection, while sole traders, freelancers and umbrella workers normally need a personal policy.
Limited company contractors can usually arrange executive income protection through their company. Sole traders and umbrella workers normally need personal income protection instead.
Contractors working through a limited company
If you operate through your own limited company, executive income protection is often the most tax-efficient way to arrange cover.
The company owns the policy, pays the premiums and receives any successful claim payments. It can then continue paying the insured director while they’re unable to work.
Depending on the insurer, cover may be based on:
- PAYE salary.
- Work-related dividends.
- Employer pension contributions.
- Employer National Insurance contributions.
Where the arrangement meets the relevant tax conditions, premiums may qualify as an allowable business expense.
Our guide to executive income protection tax explains how company premiums and claim payments are normally treated.
Sole traders and freelancers
If you trade as a sole trader, there is no limited company to own the policy.
Instead, you’ll normally arrange a personal income protection policy and pay the premiums from your own taxed income. If you make a successful claim, the benefit is usually paid directly to you.
The amount available depends on your earnings and the insurer’s underwriting rules.
Umbrella company contractors
Contractors working through an umbrella company are employees of the umbrella rather than their own business.
Executive income protection is therefore not normally available, as the contractor does not own or control the employing company.
Most umbrella workers who want additional protection arrange a personal income protection policy instead.
Choosing the right level of cover
The amount of cover you need depends on your financial commitments and how long you could manage without your normal income.
When comparing policies, consider:
- The percentage of income that can be insured.
- The deferred period before benefits begin.
- Whether cover is short-term or long-term.
- Whether the policy uses an own occupation definition.
- Whether benefits increase with inflation.
Our guide to how much executive income protection you need explains these factors in more detail.
What affects the premium?
Insurers consider several factors when calculating the premium, including your age, health, smoking status, and the level of cover selected.
Your occupation is also important. Office-based contractors and consultants generally attract lower premiums than people working in more hazardous occupations.
The deferred period also has a significant effect. Waiting longer before benefits start usually reduces the cost of cover.
Choosing the right policy
Contractors often receive income through a mix of salary and dividends, which can affect both the amount of cover available and the most suitable policy structure.
A regulated financial adviser can explain how different insurers assess contractor income and recommend the most appropriate arrangement for your circumstances.
If you’d like to compare executive income protection or personal income protection policies, you can get a quote from a regulated adviser.