Protection for Contractors and Freelancers
Contracting trades security for rate, and most people price the rate carefully and the security not at all.
A day rate that looks generous against a salary is doing considerably more work: it has to cover the holidays you do not get paid for, the gaps between contracts, the pension nobody is contributing to, and the sick pay that does not exist.
Protection is the part of that list most often postponed, usually because the first contract feels temporary and then eight years go by.
The short answer
A contractor's day rate replaces a salary and none of what sits behind one: no sick pay, no death in service, no employer pension contribution and no notice period. Where you work through your own limited company, the company can own and pay for executive income protection and relevant life cover, which is usually more efficient than buying the same cover from taxed income.
What this changes
- No sick pay of any kind, from day one
- No death in service, which you may have had for years without noticing
- No employer pension contribution, so retirement provision is entirely yours
- Income arrives through the company, usually as salary plus dividends
- Contracts can end at short notice, so income is lumpy rather than smooth
- Where there is a company, it can own and pay for certain cover
The bit people miss
The benefit most contractors have lost without noticing is group income protection. Plenty of permanent roles include it, paying a percentage of salary for years if somebody is unable to work, and it is rarely mentioned at interview or on a payslip. People leave a job that had it, start contracting, and carry on with the same sense of security while the actual safety net is gone. It usually only surfaces when somebody is ill and discovers that the answer is savings.
The Rate Is Not The Comparison
Contractors compare their day rate to a salary and the comparison is not like for like, which matters when deciding what to spend on protection.
A salary comes with paid holiday, employer pension contributions, usually sick pay, frequently death in service and sometimes group income protection and private medical cover. A day rate comes with none of it. Before deciding that protection is expensive, it is worth working out what the equivalent employee was receiving without ever seeing it on a payslip.
Done honestly, the premium for income protection and life cover is often a smaller share of the difference than people expect, and it buys back the part of employment that actually mattered.
Lumpy Income Needs Planning For
Contracting income does not arrive smoothly, and that affects two decisions.
The first is the deferred period. A contractor between assignments has no income anyway, so the question is how long the household could run on savings before cover needs to start. That is usually shorter than a permanent employee with sick pay would choose, and it costs more, which is simply the price of the structure.
The second is how income is evidenced. Insurers generally want to understand the whole picture rather than just a low PAYE salary with dividends on top, because cover based on salary alone would be far too small. Bring your accounts and recent figures so the benefit reflects what you actually earn rather than what you pay yourself through payroll.
What usually fits, and why
Owned and paid for by your company where the structure allows, covering your income if you cannot work. Usually more efficient than paying from taxed income.
Death in service for a company of one, arranged and paid for by the company rather than personally.
Rarely provided anywhere, so it is a gap whether you are permanent or contracting, and a lump sum covers gaps between contracts that monthly cover may not.
Common questions
What do contractors lose compared with permanent staff?+
Sick pay, death in service, employer pension contributions, paid holiday and often group income protection and private medical cover. Group income protection is the one people least realise they had, because it is rarely mentioned at interview or on a payslip, and it usually only surfaces when somebody is ill and finds the answer is savings.
Can my company pay for my cover?+
For certain products, yes. Executive income protection and relevant life cover are designed to be owned and paid for by a company, which is generally more efficient than buying similar cover from income you have already paid tax on. The treatment depends on how your company is set up and on your circumstances, so confirm it with your accountant.
What deferred period should a contractor choose?+
Usually shorter than a permanent employee would pick, because there is no sick pay bridging the first weeks. The question is how long the household could run on savings before the benefit needs to start. A shorter wait costs more, which is simply the price of the structure rather than a reason to stretch the wait beyond what you could survive.
How is my income assessed if I take dividends?+
Insurers generally want the whole picture rather than just the PAYE element, because a low salary with dividends on top is normal in this structure and cover based on salary alone would be far too small. Bring your accounts and recent figures and we will make sure the benefit reflects what you actually earn.
I am between contracts. Can I still apply?+
It is worth talking to us rather than assuming either way, because insurers look at your normal earnings and your work history rather than only at this week. Gaps between assignments are a normal feature of contracting. What matters is being straightforward about the pattern so that the cover is set up on a basis that holds at claim.
Cover that often goes with this
The gaps we most often find sitting next to this one.
- Executive income protectionCompany-owned cover for your income.
- Relevant life coverDeath in service for a company of one.
- Freelancer income protectionHow personal cover works alongside it.
- One-director companiesThe structure most contractors use.
- Talk to an adviserBring your accounts so we size it on real income.