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Self-employed income protection

Being self-employed can have many benefits, including flexibility and tax breaks. But as your own boss, you don’t have access to traditional employee benefits like sick pay. That’s why you might want to think about self-employed income protection.

Read our guide to income protection insurance for self-employed people and consider your options.

Being self-employed can have many benefits, including flexibility and tax breaks. But as your own boss, you don’t have access to traditional employee benefits like sick pay. That’s why you might want to think about self-employed income protection.

Read our guide to income protection insurance for self-employed people and consider your options.

Written by
Anna McEntee
Insurance comparison expert
Last Updated
15 SEPTEMBER 2023
6 min read
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What is self-employed income protection?

Self-employed income protection insurance can help you recoup some of your lost earnings if you’re unable to work due to illness or injury. With this type of cover, you can get regular payments of a proportion of your average income.

You can choose between short-term and long-term income protection.

With a short-term policy, your cover will last for a set amount of time. If your claim is successful, you’ll receive payments until you can either return to work or the policy ends, whichever is sooner.

With long-term income protection, you’ll continue to receive pay-outs until you’re able to return to work or you reach retirement age.

Do I need self-employed income protection?

Income protection insurance isn’t mandatory if you’re self-employed, but it could be extremely useful.

To decide whether you need self-employed income protection, think about what would happen if you couldn’t work for an extended period because of illness or injury. Would you have enough savings or other resources to tide you and your family over until you could work again? If the answer is no, self-employed income protection could be worth considering.

Why self-employed income protection matters

According to the Office for National Statistics, in January to March 2022, the number of self-employed people in the UK was 4.2 million. That’s just under 13% of all employment in the UK. With so many people now working for themselves, it’s important they’re protected if they become unable to work.

How does self-employed income protection work?

Self-employed income protection provides a regular monthly payment if you can’t work because of illness or injury. The payments will be made either for a fixed amount of time, or until you’re well enough to return to work, or until you retire, depending on the policy you have.

Payments aren’t made immediately after your claim is accepted. There’s a waiting or deferred period before you get your first pay-out.

Does sick pay for self-employed workers exist?

Unfortunately, there’s no statutory sick pay for the self-employed. But as a self-employed worker, you may be able to claim an Employment and Support Allowance to help with living costs if you have health issues that prevent you from being able to work.

Adults aged over 25 could receive a maximum of £129.50 a week depending on their circumstances.

Does self-employed sickness cover exist?

Yes, if you’re self employed you can get insurance cover specially designed to help you cope with a loss of income if you’re injured or unwell. With income protection cover, you can typically receive tax-free payments of 50-65% of your average income to help you keep on top of your bills.

What does self-employed income protection generally cover?

Your policy could cover your rent, mortgage payments, outstanding debts and even your employees’ salaries. Before you compare policies, you should think carefully about what expenses you’ll need to cover.

When comparing quotes for self-employed income protection, you can also choose:

  • Short-term cover to protect you for a set amount of time or long-term cover that pays out you until you’re able to work again or ready to retire.
  • The length of deferral period, which is how long you have to wait after you claim before you receive your first payment.

How much self-employed income protection cover do I need?

The amount of cover you need will be based on your income. But it can be difficult to measure the income of self-employed workers. Some self-employed people have regular, consistent work, while others work irregularly or on a project basis.

To work out your average income, most insurance providers will look at your pre-tax profits, usually over the course of the past financial year. If you were to fall ill and make a claim, the monthly pay-out you receive would be an agreed percentage of that calculated average monthly income.

How much does income protection insurance cost?

The amount you’ll pay for self-employed income protection insurance will depend on several factors, including the type of policy you choose and your personal circumstances. Insurance providers will consider:

  • What you do for a living and the risks involved in your job. For example, if you’re a contractor working on building sites, an insurance provider will likely calculate that you’re a much higher risk than a self-employed graphic designer working from home.
  • Your age. The assumption being that the older you are, the more likely you are to fall ill or suffer an injury.
  • If you have any existing medical conditions that may make you more likely to claim.
  • The level of cover you need, in terms of your average monthly income.
  • How long you want your policy to last. You’ll pay less for short-term cover.
  • How long your deferral period is. Generally, the longer you can wait, the less you’ll pay in premiums.

Is income protection taxable?

Not usually. Payments received from policies to cover sickness, disability or unemployment will generally be tax free if the premiums were paid out of taxed income, according to HMRC.

What else should I consider when comparing income protection insurance for self-employed people?

With self-employed income protection cover, your insurance provider will assess if you’re able to work if you make a claim. They’ll base their decision on the definition of being ‘fit to work’ detailed in your policy.

The terms of your income protection cover and the procedures used to assess your capacity to work can vary greatly among insurance providers. That’s why you should check the details of any policy carefully before you buy.

Some policies will only consider your ability to perform the occupation you stated when you bought the policy. Others won’t pay out if you’re able to return to work in a different role, based on your skills, qualifications and experience.

It’s also worth bearing in mind that income protection cover is not intended to cover lost income for reasons other than sickness or injury. You won’t be able to claim for loss of income caused by losing a client or a project, for example.

You should also consider that that there’s no cash-in value for self-employed income protection insurance. If you don’t use it, you won’t get any pay-out.

What other insurance policies should self-employed people consider?

Life insurance for self-employed people could be worth considering, particularly if you have dependants. There are policies tailored specifically for self-employed people.

If you’re a homeowner, mortgage protection insurance can be an alternative to self-employed income protection. Whether it’s a viable option will depend on how much you earn and what outgoings you’d need to cover if you were unable to work.

Frequently asked questions

What is a deferral period?

A deferral period is how long you’ll have to wait to get your first payment after making a successful claim if you’re injured or ill. This could be anything from a week to over a year.

When deciding about self-employment income protection policies, you should think carefully about how long you can afford to wait before receiving a payment.

Will a self-employed income protection plan cover my full income?

Income protection generally covers a percentage of your monthly income – normally around 50%-65%. This means you may need to rely on savings as well, if you have them, or cut back on spending until you’re back working.

Will income protection insurance cover lost income due to short-term sickness?

There’s normally a minimum length of time that you’ll have to be out of work due to sickness and injury before you can claim. Every policy is different, but you’re unlikely to be able to claim for short-term illnesses of less than a month.

Check your policy for details.

Does self-employed income protection include critical illness cover?

Critical illness cover is a separate type of insurance. It’s intended to cover you if you get a serious illness, like cancer, and are unable to work as a result. It usually pays out a lump sum.

Critical illness only pays out for particular illnesses named in the policy. It’s often combined with or added to a life insurance policy

Anna McEntee - Insurance comparison expert

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