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Self-employed income protection

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Self-employed income protection

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Self-employed income protection

There are many benefits to being self-employed including tax benefits and flexible working. Some occupations are also traditionally self-employed or contractors such as construction and IT.

Some of the potential problems are the risks that you are solely responsible for your business income. You would also lose your entitlement to employee benefits such as healthcare, sick pay, and pension contributions.

It is therefore often extremely prudent to make sure that your income is protected against sickness or injury.

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About self-employed income protection

Many people either don’t think that they can get income protection if they’re self-employed or think it’s too expensive.

This simply is not true because the cover is often easily available and far cheaper than you think.

Here are some of the answers to the most common questions that people ask about self-employed income protection. We also aim to explain how income protection works for people who are self-employed.

Can self-employed get income protection?

Yes – if you’re self-employed then you are still eligible to buy and claim on an income protection policy.

It is a common misconception that income protection is not available to people who are self-employed which is not true. You can take out income protection regardless of your employment status.

The only reason why you might not be able to take out income protection in the same as normal is if your income would continue during sickness. This applies to people who have employees or a business that would continue if you were unable to work.

What does income protection do for the self-employed?

An income protection policy will replace your income for a period of time if you’re unable to work because of illness or injury. This means that you won’t need to worry about paying your bills and supporting your family during periods of sickness, so you can focus on getting better.

There are a number of options that are available to suit any budget and all sorts of different requirements. Some of the main options that are available are either short-term cover which is the most common option, or long-term cover which is more comprehensive.

Read more about short-term income protection and long-term income protection insurance.

Do self-employed need an income protection policy?

The total number of self-employed people in the UK is approximately 4.4 million which is approximately 15% of employment. According to research from LV= in 2017, only 4% of self-employed workers has income protection insurance.

There is a significant risk of loss of earnings for anyone working for themselves so it’s important to have the right cover in place.

Some of the most popular reasons for becoming self-employed are flexibility and tax benefits. It may also be easier for certain types of occupations for you to be self-employed or become a contractor.

One of the main issues with self-employment is losing your employee rights that a PAYE (Pay As You Earn) individual would normally receive, including Statutory Sick Pay (SSP). It may be possible for you to be able to claim the new Employment and Support Allowance (ESA) if you are below State Pension Age, and you have a disability or medical problem that prevents you from working.

Once you’ve been assessed and you’re eligible then you’ll be put into either of 2 groups.

  • If you are aged over 25 then you might be able to claim up to £114.10 per week, if you’re in the ‘support group’.
  • Alternatively, you would be eligible for £74.70 per week if you’re in the ‘work-related activity group’.

The amount of support provided by the government is a fraction of what is generally required by most UK households.

Income protection can provide you with a tax-free monthly income that is equivalent to between 50% and 70% of your gross income. This can be used to support you and your family financially during periods of absence from work.

How much income protection do I need if I’m self-employed?

It can be difficult to calculate how much income protection you need or even can have if you’re self-employed. You will be familiar with the complex nature of self-employed income that can include:

  • Salary (or Directors Fee)
  • Dividends
  • Benefits
  • Expenses

The easiest and best way to calculate your eligibility for income protection would be to use your previous years ‘pre-tax profits’. Most insurance providers use this as the figure that they would base your income on.

If you were unable to work due to sickness or injury then your policy would pay out a percentage of this figure.

Cost of income protection for self-employed

Your premiums for income protection will be calculated based on several factors which will include:

  • Your age
  • Monthly benefit (£’s)
  • Type of cover (e.g. short-term or long-term)
  • Deferred period (1 week, 1, 2, 3, 6, or 12 months)
  • Term of cover (years)
  • Smoker status.

Each insurance provider will offer a premium based on these different elements so it’s important to select the best insurer. Terms and conditions can also vary from one insurer to another so it’s important to check the policy wording carefully.

There are also several other elements that may be taken into consideration, depending on your circumstances, such as:

Best income protection insurance for self-employed

There are lots of different options for people who are considering income protection. If you’re self-employed then you should also consider a few different elements that are specifically useful for you.

One of the other options that you might want to consider is an income protection policy with no proof of income. There are some policies that will provide you with an amount of cover (usually up to £1,500) with no income evidence required.

You can get policies that will provide you with better cover for self-employed to suit your needs and circumstances.

How can I claim income protection if self-employed?

One of the biggest questions for self-employed income protection is whether or not it will payout.

The most common misconception for income protection is that it is designed for people who are employed. This is not true and you can get income protection if you’re classed as self-employed, contractor, or freelancer.

The process for claiming income protection for people who are self-employed will be:

  • Provide GP evidence (letter or sick note)
  • Proof of income (accountant)

Your claim will then be processed and payments should then commence from the date that your deferred period ends.

Is self-employed income protection insurance tax deductible?

There are some income protection policies that are tax-efficient for certain individuals called ‘executive income protection’.

Unfortunately, standard income protection is not tax-deductible for self-employed and cannot be claimed as a business expense. You will be able to claim life insurance as a business expense and it can be tax-deductible if you are a limited company.

More about business life insurance

According to HMRC rules, you can only get tax relief on insurance premiums that are classed as a retirement benefit. This means that income protection is not tax-deductible because you should be able to return to work.

Your benefit payments from a claim would be tax-free which means that you would be paid an equivalent amount to your net income.

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