Income protection

What if I couldn't work as a contractor?

Income Protection for IT Contractors: A UK Guide

By
Pirashanth
Published
Last reviewed
Reading time
7 min read

This guide provides general information only. It is not financial advice or a personal recommendation and does not take account of your individual circumstances.

Quick answer

For most IT contractors, income stops sooner and more completely than it would for an employee. There is usually no company sick pay, no group income protection and no guarantee the contract survives a long absence. What you can fall back on depends on how you work: as a sole trader, through an umbrella company, as an agency worker or through your own limited company.

Key figures

weekly SSP in 2026/27 (or 80% of average weekly earnings if lower)
£123.25
the maximum period Statutory Sick Pay can be paid
28 weeks
Statutory Sick Pay on self-employed earnings
£0
of earnings is a typical income protection limit
50–65%

Why contracting changes the picture

A permanent employee who falls ill usually has several layers to rely on: company sick pay, then Statutory Sick Pay, and sometimes group income protection. Contracting removes most of those layers, often all at once.

  • There is no employer package. Group income protection, death-in-service cover and generous sick pay belong to permanent roles.
  • You are paid for days worked. A day rate stops on the first day you can't work.
  • The contract may not wait for you. Many contracts can be ended on short notice. A client who needs the work done may bring in someone else.
  • Gaps between contracts are normal. Illness can start when you are between assignments, which can affect what you're entitled to.

If you are moving from a permanent role, our guide to income protection for IT professionals covers what you may be leaving behind.

Your position depends on how you contract

"Contractor" isn't a single employment status. The rules on sick pay, and how an insurer looks at your earnings, depend on how you work.

| How you work | Statutory Sick Pay | Sick pay beyond SSP | How insurers usually look at earnings | |---|---|---|---| | Sole trader | Not available on self-employed earnings | None. Income stops | Taxable profit from Self Assessment, often averaged over recent years | | Umbrella company employee | Usually, through the umbrella, if you meet the eligibility rules | Only if your umbrella contract provides it | PAYE earnings from the umbrella | | Agency worker (PAYE) | May qualify through the agency, if you meet the eligibility rules | Depends on the agency contract | PAYE earnings | | Limited company director | Possible on a PAYE salary, paid by your own company | Only what your company chooses and can afford to pay | Salary and dividends, and with some insurers a share of company profits |

Sole traders

Statutory Sick Pay isn't available on self-employed earnings. If you can't work, income from your business usually stops straight away, and anything else would come from savings, any personal cover or state support.

Umbrella company employees

You are normally an employee of the umbrella company, so SSP can apply as it does for other employees. Your employment with the umbrella may be tied to your current assignment. If that ends, what you're entitled to can change.

Agency workers

If you are paid through an agency's payroll, you may qualify for SSP through the agency, subject to the usual rules. Anything above SSP depends on your contract with the agency.

Limited company directors

If your company pays you a salary through PAYE, SSP may be payable on it. It is worth remembering who pays: your own company, out of its own funds. SSP from your limited company is money moving from one of your pockets to another, not new income.

Many directors take a modest salary and the rest as dividends. SSP is based on salary alone, and dividends depend on the company making profits, which usually means you working.

How insurers look at contractor earnings

Income protection pays a monthly benefit if illness or injury stops you working, after a waiting period called the deferred period. The benefit is limited to a proportion of your earnings, typically around 50% to 65%.

For employees, earnings are usually just salary. For contractors, insurers need to decide what counts, and they don't all do it the same way:

  • Sole traders are usually assessed on taxable profit, often averaged over the last one to three years.
  • Limited company directors are usually assessed on salary plus dividends. Some insurers also consider your share of profits the company has kept rather than paid out.
  • Umbrella and agency workers are usually assessed on PAYE earnings, like employees.

If you have only recently started contracting, insurers may look at how long you have been trading and what evidence of earnings you can provide. Earnings may also be checked again when a claim is made, so it is worth understanding how the policy measures them before relying on a figure.

Personal and company-paid policies

Contractors working through a limited company generally come across two kinds of income protection.

| | Personal policy | Company-paid policy | |---|---|---| | Who owns and pays for it | You, from your own taxed income | Your company | | Who the benefit is paid to | You | Your company, which then pays you | | How the benefit is taxed | Usually paid to you tax-free | Paid to you through payroll, so taxed as pay | | If you stop contracting through the company | The policy stays with you | Cover is linked to your employment by the company |

Company-paid policies are sometimes called executive income protection. The premiums may be treated as a business expense, but the rules depend on your circumstances, so it's worth checking how they apply to you.

Our guide to income protection for limited company directors goes into more detail on how directors' earnings are measured and how the two kinds of policy compare.

Deferred periods and your savings buffer

The deferred period is how long you must be unable to work before income protection starts paying, commonly anywhere from four weeks to a year. A longer deferred period generally means a lower premium, but you need to cover the gap yourself.

For contractors, the gap is usually covered by:

  • personal savings
  • money held in your limited company, bearing in mind that taking it out may create a tax bill
  • SSP, if it applies to how you work

A useful way to think about it: how many weeks could you cover your essential costs if every day rate stopped tomorrow? That number and the deferred period are closely linked.

Some contractors also look at accident and hospitalisation cover, which pays fixed amounts from the event itself for specific injuries and hospital stays. It covers much less than income protection, but it doesn't have a deferred period for accidents.

If you're ill between contracts

Gaps between contracts are a normal part of contracting, but they can matter if you fall ill during one.

  • Sick pay may not apply. If you are not employed by an umbrella or agency at the time, there may be no SSP to fall back on.
  • You may still count as employed. If you work through your own limited company, or an umbrella that keeps you on between assignments, you may still be employed without a client. How a policy treats that can depend on your arrangements.
  • Policy definitions can change. Some income protection policies use a different, stricter test of incapacity if you were not in paid work when you became ill.
  • Earnings may be averaged. A policy might look at earnings over a period before the claim, so a long gap could affect the amount.

The policy wording sets out how gaps are treated. It is one of the more important details for contractors, and one that generic comparisons often leave out.

A hypothetical example

Tom is a QA automation contractor working through his own limited company. He pays himself a small salary through PAYE and takes the rest as dividends. Halfway through a six-month contract, a back problem needs surgery and he can't work for eight months.

  • Week 1: his day rate stops. His client ends the contract after a short notice period and brings in a replacement.
  • SSP: his company can pay him SSP on his small salary for up to 28 weeks, but it comes out of the company's own reserves.
  • Dividends: with no contract, the company has no new income, so there are no new profits to pay dividends from.
  • Without cover: the eight months are funded by company reserves and personal savings.
  • With a personal income protection policy and a 13-week deferred period: after 13 weeks, a monthly benefit based on his assessed earnings starts and continues until he can return to work, subject to the policy terms.

Tom's situation isn't unusual. What makes the difference is how much of the gap he has planned for, and how.

Questions worth considering

  • How do I work: sole trader, umbrella, agency or my own limited company?
  • If a contract ended tomorrow because I was ill, how long could I cover essential costs?
  • How much is held in my company, and what would it cost to take it out?
  • How would an insurer measure my earnings, especially if I'm new to contracting?
  • What happens under a policy if I'm between contracts when I fall ill?

Frequently asked questions

Sources

Related questions

Need advice about your own circumstances?

General information can't take account of your individual circumstances. If you'd like personalised advice, you can speak to an adviser.

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