Income protection for limited company contractors
If you’re a contractor, being unable to work for several months can quickly become expensive. Your contracts may stop generating income, but your mortgage, bills and other personal costs won’t.
How you arrange income protection depends largely on how you work. If you contract through your own limited company, you can usually consider executive income protection. Sole traders and umbrella company contractors will normally need personal cover instead.
Contractors working through a limited company
Executive income protection allows your limited company to take out the policy on your behalf.
The company pays the premiums and, if you’re unable to work and have a valid claim, receives the insurance payments. It can then use that money to continue remunerating you while you’re off work.
This can be particularly useful for contractors because the salary you take from your company may represent only part of what you actually earn.
Depending on the insurer, the amount available may take account of:
- PAYE salary;
- work-related dividends;
- employer pension contributions; and
- employer National Insurance contributions.
For more information on how salary and dividends can affect your cover, read our guide to salary vs dividends for income protection.
How is executive income protection taxed?
With executive income protection, your limited company pays for the policy rather than you paying the premiums out of your own pocket.
The company may be able to claim the premiums as a business expense for corporation tax purposes.
If you make a successful claim, the insurer normally pays the benefit to your company. The company can then use the money to continue paying you while you’re unable to work.
For more information on premiums and claims, read our guide to executive income protection tax.
What happens if your contract ends?
This is an important distinction for contractors. Income protection doesn’t insure your contract or guarantee your company’s income.
If a client ends your contract and you’re perfectly capable of working, you can’t claim simply because you haven’t found another assignment.
The position is different if an illness or injury leaves you unable to do your job. Once you’ve been off work for the agreed deferred period, you may have a claim under the policy.
For more information on this distinction, read our guide to executive income protection exclusions.
What about sole traders and freelancers?
Sole traders can’t use executive income protection in the same way, as there’s no limited company to take out the policy.
Instead, you’d normally take out personal income protection and pay the premiums yourself. If you later claim, the insurer pays the benefit directly to you.
How much cover you can get will usually be based on your earnings.
What about umbrella company contractors?
If you work through an umbrella company, you’re an employee of the umbrella rather than a director of your own limited company.
You therefore can’t normally arrange executive income protection through the umbrella yourself.
If you want additional income protection, you’ll generally be looking at a personal policy instead.
How much cover should a contractor have?
Start with what you’d actually need each month if you couldn’t work.
Your mortgage or rent, household bills, food, debt repayments and family costs won’t disappear because you’re between insurance payments. You can then take account of savings, other household income and any money you could draw on while you’re off work.
There’s no advantage in automatically buying the maximum benefit an insurer will offer if you don’t need it.
For more information on working out an appropriate benefit, read our guide to how much executive income protection you need.
How long could you manage before payments start?
Income protection doesn’t start paying as soon as you stop working. You’ll choose a deferred period when you take out the policy.
If you’ve built up a reasonable amount of money in the company or have personal savings, you may be comfortable waiting longer before payments begin. A longer deferred period will usually mean a lower premium.
If you don’t have much to fall back on, a shorter waiting period may be more useful even though it costs more.
For more information on the different options, read our guide to executive income protection deferred periods.
Does your occupation matter?
Yes. What you actually do for a living matters, not just the fact that you call yourself a contractor.
An IT contractor working from home is a very different insurance risk from an engineering contractor who spends most of the week on industrial sites.
Your job can affect both the premium and the cover you’re offered. It can also affect the test used if you later become too ill or injured to work.
When comparing policies, check how your occupation is covered rather than focusing on price alone.
For more information on this, read our guide to what ‘own occupation’ means for executive income protection.
How long should the policy pay for?
You can choose cover that pays a claim for a limited period, such as one, two or five years, or longer-term protection that can potentially keep paying for much longer.
Short-term cover will normally cost less. The downside is obvious if you’re unfortunate enough to develop an illness that keeps you out of work beyond the end of the benefit period.
For more information on the differences, read our comparison of short-term vs long-term executive income protection.
What affects the premium?
There’s no standard price for contractor income protection. Your age, health, occupation and the amount of cover you want will all affect the quote.
The choices you make about the policy matter too. A shorter deferred period or longer benefit period will generally cost more.
For more information on pricing, read our guide to how much executive income protection costs.
Choosing income protection as a contractor
If you have your own limited company, you can compare executive income protection with taking out personal cover yourself.
For contractors, one of the main things to check is how much of your salary and dividends the insurer will cover. You’ll also need to decide how soon you want payments to start and how long you’d want them to continue.
And if a contract ends while you’re perfectly fit to work, that’s a commercial risk rather than an income protection claim.
If you’re a limited company contractor considering income protection, a specialist IFA can answer your questions, check how different insurers will treat your contractor income and compare quotes from leading providers.