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Income protection for small business owners, and sole traders
Income protection for small business owners replaces part of your earnings if illness or injury stops you working.
If you work for yourself there is usually no employer sick pay behind you.
This guide sets out the policies, who each one pays, and how HMRC taxes them for a sole trader and for a limited company.
Every claim here is our summary of a named external source, linked beside it. Sources change: check the wording at the link before you rely on it.
Why small business owners need income protection
MoneyHelper says that when you are self-employed you won't get sick pay, although you might qualify for state benefits (MoneyHelper ↗).
It calls going without an income particularly difficult if you are self-employed and have no sick pay to fall back on (MoneyHelper ↗).
Long-term income protection protects you if your earnings drop because of sickness and injury, and typically pays out between 50% and 65% of your income (MoneyHelper ↗).
Five policies, and who each one pays
Some of these replace your own income; others pay the business.
Knowing who receives the money is the quickest way to tell them apart.
MoneyHelper says short-term policies, sometimes called accident, sickness and unemployment products, usually only pay out for one or two years (MoneyHelper ↗).
- Pays you
Income protection
A regular income until you retire or return to work (MoneyHelper ↗).
- Pays you
Short-term cover
Usually pays for one or two years only (MoneyHelper ↗).
- Pays the business
Locum or overheads cover
Indemnifies business costs, such as a locum or fixed overheads, while you are ill (HMRC ↗).
- Pays the company
Executive income protection
For a limited company: funds a director's or employee's sick pay (Legal & General ↗).
- Pays the company
Key person income protection
A monthly benefit to fund a replacement, protect profits or help with loans (Legal & General ↗).
Tax treatment: sole trader vs limited company
Sole trader, own cover. HMRC says premiums a sole trader or partner pays for life, accident or sickness cover on themselves are not allowable deductions, and the benefits are not trading income (HMRC ↗).
The law says no income tax arises on such payments where no premium was deductible and the policy's conditions are met (legislation.gov.uk ↗).
Sole trader, business costs cover. Premiums on a policy that insures business costs such as a locum or fixed overheads are allowable, and the benefits are trading receipts (HMRC ↗).
Limited company. Where the company insures its own sick pay, HMRC calls this a funding arrangement: the sick pay is taxable as the employee's earnings, and the right to receive it is not a chargeable benefit (HMRC ↗).
Whether the company can deduct the premium depends on the facts; ask your accountant.
Rows summarise HMRC's manuals and the legislation; tax depends on your facts, so check it with your accountant.
Income protection vs key person insurance for sole traders
Income protection replaces your personal income.
Key person cover is owned and paid for by the business, and pays the business (Legal & General ↗); Legal & General's Key Person Income Protection pays it a monthly benefit while the covered employee cannot work (Legal & General ↗).
Tick what you want cover for; the needle shows which kind of policy matches, and it is not a recommendation.
Tick what you want covered
The needle moves with each answer.
Choosing a deferred period, and what drives the cost
MoneyHelper says there is often a pre-agreed waiting (‘deferred’) period before payments start, that the most common are 4, 13, 26 weeks and a year, and that the longer you wait, the lower the monthly premiums (MoneyHelper ↗).
It lists what affects the cost: your age, your occupation, whether you smoke, the percentage of income covered, the waiting period, the range of illnesses and injuries covered, and your health (MoneyHelper ↗).
Move the line to how many weeks your savings would last.
- Individual income protection (MoneyHelper)First option: 13 weeks
MoneyHelper says the most common waiting periods are 4, 13, 26 weeks and a year.
Published deferred periods, placed on one scale.
The lit option is simply the first one that starts at or after your figure; it is not a recommendation, and a quote may offer other terms.
Check each at its source: MoneyHelper ↗.
Check it for yourself
Every claim on this page is our summary of one of the documents listed here.
We last checked them against the live sources on 28 September 2026.
The documents are the authority, not this page.
Insurers and HMRC update them, so validate any figure or condition at its link before you rely on it.
- MoneyHelper: personal insurance when self-employed ↗No sick pay, and the covers to consider
- MoneyHelper: what is income protection insurance? ↗What it pays, waiting periods and what affects the cost
- GOV.UK: Statutory Sick Pay ↗How long an employer pays SSP
- HMRC Business Income Manual, BIM45560 ↗Sole traders and partners insuring themselves
- HMRC Business Income Manual, BIM45565 ↗Locum and fixed-overheads sickness policies
- ITTOIA 2005, section 735 ↗When health insurance payments are free of income tax
- HMRC Employment Income Manual, EIM06410 ↗Sick pay funded by the employer, including through insurance
- Legal & General Executive Income Protection ↗Pays the business, to fund the employee’s sick pay
- Legal & General Key Person Income Protection ↗Pays the business while the key person cannot work
- Legal & General key person insurance ↗Owned and paid for by the business, and pays it
Income protection for small business, answered
Not financial advice. This page is general information. Before buying insurance, the FCA tells consumers to check the firm on its Firm Checker (FCA ↗). For free guidance, see MoneyHelper.