Key takeaways
- Employers' liability insurance is the only business insurance most contractors are legally required to have, and only once they employ someone.
- A company employing only its owner, where that person holds 50% or more of the shares, is exempt from employers' liability insurance.
- Employers' liability cover must be at least £5 million, with fines of £2,500 a day for not being properly insured.
- Professional indemnity and public liability are optional in law but often required by client and agency contracts, which set the level of cover.
- Business insurance premiums are deductible when incurred wholly and exclusively for the business; personal cover follows separate rules.
Only one business insurance is a legal requirement for most contractors, and many one-person companies do not need even that. Employers' liability insurance is compulsory once you employ someone, but a company whose only employee is its owner, holding at least half the shares, is exempt. Everything else, including professional indemnity and public liability, is optional in law. In practice your client or agency contract often requires them, so the contract is where to start.
What the law requires: employers' liability
You must have employers' liability insurance as soon as you become an employer. The policy has to come from an authorised insurer and cover at least £5 million. You can be fined £2,500 for every day you are not properly insured, and £1,000 for not displaying the certificate where employees can see it or not showing it to an inspector who asks (GOV.UK).
The Health and Safety Executive lists the exemptions. Two matter to contractors (HSE40):
- A company employing only its owner, where that employee also owns 50% or more of the issued share capital. This covers most one-director contractor companies.
- A family business where every employee is a close relative. This exemption does not apply to a family business incorporated as a limited company.
So if you take on a member of staff, or your company has a second employee such as a spouse on the payroll, check the position before they start.
What clients and agencies usually ask for
Professional indemnity
Professional indemnity insurance covers claims that your advice, design or work caused a client a financial loss, for example a mistake in a specification or a missed deadline that costs them money. It is the cover contracts most often require for consultancy, IT, engineering and other professional work. Some regulated professions have their own rules on it, set by their regulator.
Public liability
Public liability insurance covers claims that your work injured someone or damaged their property, for example at a client's office or a customer's home. It matters most if you work on client premises or with the public.
Contracts usually set the minimum level of cover for each. Read the insurance clause before you sign, and match your policy to it rather than to a rule of thumb.
Other covers to consider
- Business equipment: repair or replacement of laptops, tools and other kit that you cannot work without.
- Cyber: costs after a data breach or attack, relevant if you hold client data or personal information.
- Personal accident or income protection: an income if illness or injury stops you working. Cover for your own health is treated differently for tax, see below.
- Business interruption: lost income when an insured event stops the business trading.
- Product liability: claims from products you make, sell or supply.
- Media liability: claims arising from content you publish, such as the unlicensed use of an image.
Whether each is worth it depends on the work you do and what it would cost you to go without. Compare policies on the cover limits, the excess and the exclusions, not just the premium.
Is business insurance tax deductible?
GOV.UK lists insurance among the financial costs a self-employed person can claim (allowable expenses). For a limited company, premiums are deductible when they are incurred wholly and exclusively for the business, under HMRC's Business Income Manual (BIM45500). Policies that protect you personally, such as cover for your own health, follow separate rules (BIM45560), so check those with your accountant before putting them through the company.
IR35 and insurance
Inside or outside IR35, your insurance needs come from the work and the contract. If you work through an umbrella company, you are its employee, so ask what cover it holds and whether your client still wants professional indemnity in your own name. Our guide to IR35 explains how status is decided.
How GoForma helps
Your GoForma accountant records premiums in your accounts and tells you which are deductible. For contractors working through a limited company, see contractor accountants and how to pay yourself as a contractor.
