Income protection

What if I'm paid through my own limited company?

Income Protection for Limited Company Directors: A UK Guide

By
Pirashanth
Published
Last reviewed
Reading time
5 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

If you're paid through your own limited company, income protection can be arranged personally or paid for by the company. Both can replace part of your income if illness or injury stops you working. The main differences are who pays, how the benefit is taxed, how your earnings are measured and what happens to the cover if you close the company or change how you work.

Key figures

main ways to arrange cover: a personal policy or a company-paid policy
2
weekly SSP in 2026/27 (or 80% of average weekly earnings if lower), paid by your own company
£123.25
of earnings is a typical income protection limit
50–65%

Why directors' income is different

Most people who work through their own limited company pay themselves in two ways: a modest salary through PAYE, and the rest as dividends from company profits. That works well while the company is earning. It works much less well if you can't work.

  • Statutory Sick Pay only applies to salary. If your salary is modest, so is the amount SSP is based on, and your company pays it from its own funds.
  • Dividends depend on profits. If you can't work, there is usually no new income for the company, so no new profits to pay dividends from.
  • Company reserves can help, at a cost. Money kept in the company can support you for a while, but taking it out may create a tax bill.

Our guide to income protection for IT contractors compares limited company directors with sole traders, umbrella employees and agency workers.

How insurers measure a director's earnings

Income protection limits the monthly benefit to a proportion of your earnings, typically around 50% to 65%. For a director, the question is what counts as earnings.

  • Salary paid through PAYE is usually included.
  • Dividends are usually included, often based on recent company accounts and your tax returns.
  • Retained profits are included by some insurers, based on your share of profits the company has kept rather than paid out.
  • Employer pension contributions are included by some insurers, particularly on company-paid policies.

Insurers set out their own rules, and they differ. If you pay yourself mostly in dividends, or keep a lot of profit in the company, how an insurer measures earnings can make a large difference to how much cover is available.

If your company is new, there may be little history to go on. Insurers may ask how long you have been trading and what evidence of earnings you can provide.

Personal policy or company-paid policy

There are two main ways a director can arrange income protection.

| | Personal policy | Company-paid policy | |---|---|---| | Who owns it | You | Your company | | Who pays the premiums | You, from income that has already been taxed | Your company | | Who the benefit is paid to | You | Your company | | How you receive the benefit | Directly | Through payroll, as pay | | How the benefit is taxed | Usually tax-free | Taxed as pay, like salary | | If you close the company or stop working through it | The policy stays with you | Cover is linked to your employment by the company |

Company-paid policies are often called executive income protection.

Where the money comes from

The difference in how the premiums are paid is easy to overlook. A pound you pay personally has usually already been through corporation tax and then dividend tax on the way to you. A pound paid by the company has been through neither. That is why company-paid cover can cost the business less than the same premium paid personally, even though the benefit is taxed when it reaches you.

Whether premiums can be treated as a business expense depends on the circumstances, so it is worth checking with an accountant how the rules apply to your company.

What happens to the benefit

With a personal policy, the benefit is paid to you and is usually free of income tax.

With a company-paid policy, the benefit is paid to the company. The company then pays you through payroll, so it is taxed as pay. Some company-paid policies can also help the company keep paying pension contributions for you while you are off work.

If your circumstances change

A personal policy stays with you if you close the company, move into permanent employment or switch to an umbrella. A company-paid policy is tied to your employment by the company, so a change in how you work can mean the cover ends. Health can change over time, and new cover is assessed on your health when you apply.

Using company reserves during a deferred period

The deferred period is how long you must be unable to work before income protection starts paying. Directors with money in the company sometimes think about reserves as part of how they would get through that period.

It is worth knowing how much is in the company, how much you could take out, and what tax that would create. The answer affects how long you could manage before any benefit starts.

A hypothetical example

Aisha runs a one-person software consultancy through her own limited company. She pays herself a modest salary and takes the rest of her income as dividends.

  • If she can't work for six months without cover, her company can pay SSP on her small salary, from the company's own funds. There are no new contracts, so no new profits for dividends. She relies on company reserves and personal savings.
  • With a personal policy, a benefit based on her assessed earnings is paid to her after the deferred period, usually tax-free. She pays the premiums from money that has already been taxed.
  • With a company-paid policy, her company pays the premiums. After the deferred period the benefit goes to the company, which pays it to her through payroll as taxable pay.

The two options aren't better or worse in general. They trade off cost, tax and flexibility differently, and which matters most depends on the individual.

Questions worth considering

  • How much do I pay myself as salary, and how much as dividends?
  • How much profit does my company usually keep rather than pay out?
  • How long could company reserves and personal savings cover essential costs?
  • Would I want cover that stays with me if I closed the company or went permanent?
  • How would premiums be treated for tax in my company's circumstances?

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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Pirashanth, who writes What If Guides, also works as a protection adviser. If you use this link you may be directed to Pirashanth's adviser page, and Pirashanth may benefit commercially if you become a client. What If Guides itself does not provide financial advice.