Income Protection for self employed contractors

In the UK, we’re not great at saving [1]. The average Brit has just under £18,000 saved for a rainy day, which doesn’t sound too bad, right? Unfortunately, half of Brits have £1000 or less in savings, with 23% of Brits having no savings at all. For the members of the population working secure, salaried jobs, this might not sound like too much of a worry, as they can rely on a regular pay cheque. However, throw being self employed into the mix of things and suddenly you’re looking at a lot of financial anxiety should you be down on your luck with work.

To add just a little more financial stress to the mix, an estimated 185.6 million [2] work days were lost to sickness and injury across the UK last year. So how can you protect yourself from getting sick or hurt in a way that stops you from going to work? 

The bad news is that you can’t. None of us are infallible, but there are ways to protect your income and make sure you can put food on the table and keep the lights on. It sounds scary but there’s no need to panic! Ever heard of a little thing called income protection insurance?

What is income protection insurance?

Income protection is designed to replace your income if you were to become seriously ill or injured. It pays a percentage of your normal salary per month - usually between 50% and 70% - and the cost of a policy depends on your age, job, your health and lifestyle and the percentage of income you’d like to cover. 

When you take out your income protection policy, you’ll agree to a ‘deferral’ period. This refers to the period of time between making the claim and being paid. The longer the deferral period is, the cheaper the premiums will be. If you’ve got a chunk of savings or a partner who can shoulder the finances for a little while, you might be able to set a longer deferral period. 

How does income protection work for self employed people?

Being self employed sure has its perks. If you’re a contractor, you can pick your jobs, pick your hours, and pick your salary - which sounds like a winning combo, right? However, if you’re self employed then a lot more rests on your shoulders. You don’t get sick leave, a pension contribution, or maternity leave, and if you get sick you’ve got no one to bail you out, and if you can’t work, the bills still need paying. You may also have bills from your business to pay, such as staff wages, rent and utilities. 

This is why income protection should be factored into your business plan if you’re self employed. If you’re self employed and taking out an income protection policy, your monthly income is based on your share of the pre-tax profits generated by your business.  Some insurers also consider dividends income from your business if you own a limited company, as long as the dividend income is clearly related to work activities, and is paid from current year annual profits net of tax.

When you’re in a job that often relies on you being in good physical health, it’s so much harder to continue working with an illness or injury. Not everyone needs the same amount of protection, and not everyone is equally at risk.

In 2022, 34% [3] of income protection claims were made for musculoskeletal issues such as neck and back pain. If someone with an office job suffered a neck or back injury, it’s likely that they would need little or no time away from work, but if a builder or carpenter suffers a muscle or skeletal injury, it’s likely to make it difficult for them to carry out their duties until they’ve recovered or rehabilitated. 

Simply put - contractors are at a higher risk, so they’re in greater need of protection. Self-employed contractors are in even more of a precarious position because they won’t get sick pay from an employer.

References:

[1] Finder - Savings statistics: Average UK savings in 2024
[2] Office for National Statistics - Sickness absence in the UK labour market
[3] ABI - Protection insurers pay out £6.85 billion to support individuals and families