Self-Employed Income Protection: What You Need to Know

No employer, no sick pay: the gap you are covering

If you work for yourself, there is no HR department to fall back on when you are ill or injured. Statutory Sick Pay is not available to the self-employed, and there is no paid leave while you recover from a broken wrist, a back operation or a course of treatment. The business simply stops, and so does the money coming in.

That is the gap that income protection is designed to fill. It pays a monthly benefit if you cannot work because of illness or injury, usually until you recover, retire or reach the end of the policy term. For a sole trader with a mortgage and children, it can be the difference between a difficult few months and a financial crisis.

It is worth saying plainly: this is not a luxury product for high earners. It is practical cover for anyone whose income depends on them being fit enough to turn up.

What self-employed income protection actually pays for

Most policies pay out a percentage of your income — commonly around 50% to 70% — and the money is yours to spend as you choose. Mortgage, council tax, energy bills, food, childcare, business overheads such as insurance, accountancy fees and software subscriptions. There is no requirement to ring-fence it for personal costs.

• Deferred period: the waiting time before payments start, often 4, 8, 13 or 26 weeks. The longer you can manage, the cheaper the cover.
• Benefit period: how long payments continue — two years, five years, or up to retirement age.
• Definition of incapacity: "own occupation" cover pays if you cannot do your specific job, which is usually the stronger option for tradespeople and professionals alike.

If you run a limited company and take a mix of salary and dividends, be aware that cover is usually based on your relevant earnings — broadly the salary and reported share of profits that HMRC recognises. Your accountant's figures will be part of the application, so keep your self-assessment records tidy.

Working out how much cover you need

Start with your essential outgoings, not your ideal lifestyle. Add up the mortgage or rent, utilities, council tax, insurance, food, transport, school costs and any minimum debt repayments. Then add the business costs that carry on whether you work or not — premises rent, professional indemnity cover, the phone contract, the van lease.

That total is the number your policy needs to reach. Anything above it is comfort; anything below it is a hole. Many families also use a staged approach: a shorter deferred period of four to eight weeks funded by a savings buffer, with a longer-term policy behind it.

An emergency fund of three to six months' outgoings does a lot of quiet work here. It bridges the deferred period, keeps the household steady, and means you are not forced into the cheapest, weakest policy out of panic.

Underwriting, exclusions and the details that catch people out

Insurers assess your age, health, smoking status, occupation and the type of work you do. Being honest at application stage matters enormously — a missed detail about an existing back problem or a recent referral can lead to a claim being declined years later when you need it most.

• Pre-existing conditions may be excluded or loaded onto the premium.
• Mental health is generally covered, though some policies apply shorter payment limits, so read the wording.
• Occupation class affects price. A roofer and a web designer pay very differently, and a change of job should be reported.
• Reviewable premiums can rise over time; guaranteed premiums cost more but stay fixed.

Also consider how income protection sits alongside critical illness cover, life insurance and any sick pay from a partner's employer. Overlapping policies are not wasted money, but you should know what each one does.

Protecting the home that funds the business

Your income and your home are tied together, so it is worth tightening both. Standard home insurance often excludes business equipment, stock and tools used for work, and a claim for a stolen laptop or a workshop full of kit can be refused if the insurer was never told. Ring them and confirm.

• Store tools, laptops and stock in a locked cabinet or room, and mark equipment with a UV pen or asset labels.
• Fit a working alarm, motion-sensor lighting and, if you keep valuable kit on site, a camera covering the entrance.
• Never leave a laptop visible through a ground-floor window, even for ten minutes.
• Keep business paperwork and client data backed up off-site or in the cloud, encrypted.
• Check that any outbuilding used as an office meets your insurer's security requirements.

Reviewing cover as life and business change

A policy set up five years ago may no longer match your mortgage, your family or your income. Put a date in the diary each year — around the time you file your tax return is as good a moment as any — and check the benefit amount, the deferred period and whether your occupation details are still accurate.

If money is tight, adjust the deferred period rather than cancelling altogether. A policy that pays after 13 weeks is far better than no policy at all. And if you take on an employee, change your trading structure or move premises, tell your adviser. Small updates now prevent unpleasant surprises on the day you actually need to claim.