As traditional ‘sick pay’ is not available to freelancers and self-employed workers, income protection insurance can provide peace of mind in case you are not able to work due to illness or injury. Below we explain whether, as a ‘business’-related policy, income protection insurance can be classed as a business expense.

Income protection insurance business expense

Note: It is advisable to consult your accountant on all matters regarding taxation. The below is intended as general advice and guidance.

How does income protection insurance work?

An income protection policy pays out a pre-agreed monthly payment while you are unable to work, which can last all the way to retirement age if you have a serious illness. The amount of monthly payment, or benefit, you receive depends on your income and the ‘deferred period’ you set (the amount of time before the policy starts to payout).

You can choose to set the deferred period to an amount of time that suits you, which is usually between four weeks and a year. There are also some policies available that will start to pay out from ‘day one’ – which may be suitable if you do not have any savings to rely on.

Find out more: Income protection insurance – what is a deferred period?

The cost of your premiums will depend on the length of the deferred period and the level of benefit you require each month.

Should your business pay income protection insurance premiums?

If you are a company director of a Limited company, you may want your business to pay the premiums as a business expense.

As personal income protection premiums are paid out of your net income, the benefit pay out you receive if you make a claim is paid tax-free.

If you wish to pay your income protection insurance premiums through your limited company as a business expense then it is recommended that you take out an Executive Income Protection policy rather than a personal policy.

With an executive, or ‘directors’, income protection policy, the premiums can be paid by the business and any claim pay out would then be paid to the business – which would need to then distribute the pay out as income that would then be subject to tax.

As you would need to cover a higher amount to allow for the tax, with an executive policy the insurance company will typically allow you to cover as much as 80% of the gross earnings, rather than the 60% that is typically available with a personal policy.

In a nutshell, the business can take out an executive income protection policy and pay the premiums on your behalf and the benefit will be paid to the business – which would then need to pay you via the PAYE system.

Whether this kind of arrangement better suits you will depend on your own individual circumstances and tax arrangements. We would therefore advise that you speak to your accountant before deciding on taking out an executive income protection insurance policy.

Find out more about income protection insurance:

Income protection insurance for the self-employed

We have partnered with Vitality to offer income protection and life insurance for freelancers and the self-employed

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