Income protection for limited company directors

As the owner and main earner of your business, you depend on your ability to work. Unfortunately, sickness or injury can strike anyone. Executive income protection lets your company fund a policy that pays out if you can’t work, so the business can continue to pay you.

Why use a company‑funded policy?

Executive income protection is more tax‑efficient than buying a policy personally. The premiums are normally deductible for corporation tax【961535310750679†L68-L72】 and they aren’t treated as a benefit‑in‑kind, so you don’t pay income tax or National Insurance on them【527479148628041†L128-L143】. By contrast, personal premiums have to be paid from your post‑tax income.

Because the company owns the policy, it receives the benefit and uses it to continue paying you. The payout is taxed as trading income when distributed【630553220736033†L100-L107】. Personal policy claims are tax‑free【630553220736033†L100-L109】.

How much cover can you have?

Executive policies typically insure up to 70–80 % of your salary and dividends【961535310750679†L81-L92】. Some plans will also insure employer NIC and pension contributions【961535310750679†L110-L120】. Personal plans usually cap the benefit at around 60–65 %. You can choose a deferred period (usually between four weeks and a year) and whether the policy pays for a limited period or until retirement.

Example scenario

Imagine your company pays you a salary of £40,000 and dividends of £30,000 per year. You insure 75 % of this income via an executive policy. If you’re unable to work for six months, the insurer pays your company £4,375 a month (75 % of £70,000 ÷ 12). Your company uses this income to continue paying your salary and dividends. The premiums are an allowable expense and reduce your corporation tax bill. By contrast, a personal policy would pay up to around £3,800 a month tax‑free, but you would have paid the premiums from taxed income.

Setting up your policy

1. Assess your needs: Consider your salary, dividends and household expenses. Decide how much income you’d need if you were off work.
2. Choose a deferred period: This is the waiting period before the benefit starts. Shorter deferred periods cost more but pay sooner.
3. Pick benefit duration: Do you want cover to pay for a limited period (12 or 24 months) or until your intended retirement age?
4. Get quotes: Use the form on our Get a quote page. Our partner, Broadbench Ltd, will compare policies from the market and explain the options.
5. Complete the application: Your company applies for the policy. You may need to answer medical and lifestyle questions, and possibly undergo a medical exam.
6. Review regularly: As your income and business circumstances change, update your policy to ensure you’re adequately protected.

What about sole traders?

If you operate as a sole trader or freelancer, executive income protection isn’t available because there is no separate company to own the policy. However, you can still take out a personal income protection plan. The premiums aren’t tax‑deductible, but any claim is paid tax‑free. It can be a vital safety net when you’re self‑employed.