Insurance is the classic thing freelancers skip until a client's contract demands it, then buy in an afternoon at whatever price ticks the box. It is worth understanding once, properly, because the shape of it is simpler than it looks: most self-employed people need two covers, one cover is compulsory the moment you employ somebody and carries a daily fine if you skip it, and the rest are situational. Almost all of it is deductible, and one important policy is not — which is the part people get backwards.

The two most freelancers actually need

  • Professional indemnity (PI) — covers you if a client claims your advice, your work or a mistake in it cost them money. This is the one for anyone selling knowledge or a deliverable: consultants, designers, developers, copywriters, coaches, bookkeepers. It is rarely required by law but very often required by contract, and client contracts usually specify a cover level rather than leaving it to you.
  • Public liability (PL) — covers injury to a person or damage to property caused by your business. This is the one for anyone whose work happens in physical space: you go to client sites, clients come to you, you work in someone's home, you set up at events. A joiner or a personal trainer needs public liability far more urgently than professional indemnity.

Plenty of freelancers need both, and most insurers will sell them as one package for less than the two bought separately. Do not assume you need both by default, though — the honest test is whether your risk is "my advice was wrong" or "I broke something", and for many people it is squarely one of the two.

Employers' liability: the one the law forces, and the fine attached to it

Employers' liability insurance is compulsory under the Employers' Liability (Compulsory Insurance) Act 1969 the moment you employ someone. The requirements are specific and the penalties are the largest numbers in this article:

  • Minimum cover is £5 million, and the HSE is explicit that the £5 million includes legal costs — which is why most insurers offer at least £10 million as standard.
  • The fine is up to £2,500 for every day you are not properly insured. Not per inspection, not per employee. Per day.
  • Your insurer gives you a certificate, and you must display it where employees can read it. Failing to display it, or refusing to produce it for an HSE inspector, is a separate £1,000 offence. Since 1 October 2008 you have been allowed to display it electronically, so an intranet page or a shared folder your staff can reach is enough.

Two exemptions are worth knowing because self-employed people fall into them more often than most employers. You do not need employers' liability cover if every employee is a close relative — the Act's list runs husband, wife, civil partner, parent, grandparent, step-parent, child, grandchild, step-child, brother, sister and half-sibling. That exemption disappears the moment the family business is a limited company. Separately, a company whose only employee is its owner is exempt where that employee also owns 50% or more of the issued share capital, which is what keeps most single-director companies out of scope.

What three months uninsured actually costs

Illustratively, take a self-employed landscaper who takes on one part-time employee in April and gets round to the insurance in July. Ninety-two days pass with an employee on the books and no employers' liability policy in force.

  • Maximum exposure on the daily fine: 92 × £2,500 = £230,000.
  • Plus £1,000 for the certificate that was never issued and so never displayed.
  • And, separately from any fine, the whole cost of any injury claim that employee brings — because the point of the policy is that it pays the claim, and without it the money comes out of the business and then out of the owner personally.

The fine is a maximum rather than a tariff, and a first offence disclosed voluntarily is not going to land at £230,000. That is not really the point. The point is that a policy costing a few hundred pounds sits between the business and a number with six figures in it, and there is no version of that trade that makes sense.

The situational covers

  • Product liability — if you make, import or sell physical products, including as a side-line to a service business.
  • Tools and equipment cover — for tradespeople and anyone whose kit is the business. Usually bolted onto a public liability policy far more cheaply than bought alone, and usually with a per-item limit worth reading before you assume the £2,000 camera is covered.
  • Business contents and portable equipment — laptops, cameras and gear, particularly if you work from home or on the move. Home insurance frequently excludes business equipment and business visitors, so check the policy you already have before buying a second one.
  • Cyber insurance — relevant once you hold meaningful volumes of client data, and increasingly asked for in corporate supplier contracts.
  • Income protection — personal rather than business, and for a sole earner arguably the most important cover of the lot. Our post on the self-employed safety net covers what the state actually pays if you cannot work, which is the reason this one matters so much.

The tax: what a premium really costs you

Business insurance premiums are an allowable expense, deducted from your profit before tax. There is also a tax inside the premium that nobody mentions at the point of sale. Insurance Premium Tax is charged at a standard rate of 12%, unchanged since 1 June 2017, with a higher rate of 20% on travel insurance and on cover sold alongside certain goods. IPT is not VAT. Being VAT-registered does not let you reclaim it on your VAT return, so the whole premium — IPT included — is simply a cost, and the whole premium is what you deduct.

Putting numbers on it. Illustratively, a freelance consultant has taxable profit of £58,000 and pays £520 a year for a combined professional indemnity and public liability policy:

  • Of that £520, roughly £55.71 is Insurance Premium Tax (£520 ÷ 1.12 = £464.29 of premium, plus 12%). None of it is reclaimable.
  • At £58,000 of profit the consultant is above the £50,270 higher-rate threshold, so the marginal cost of a pound of profit is 40% income tax plus 2% Class 4 National Insurance — 42%.
  • Deducting the £520 therefore saves £218.40 in tax and National Insurance, and the real cost of the cover is £301.60 for the year, or about 83p a day.

Record it like any other cost in your bookkeeping — the same discipline our guide to expenses and home working applies to everything else you claim. Premiums paid annually rather than monthly are usually cheaper, and the monthly option is often credit with interest attached rather than a payment plan.

The exception: income protection Premiums on a personal income protection policy are not deductible against your self-employment profit. They fail HMRC's wholly-and-exclusively test because the policy replaces your personal income rather than meeting a cost of the trade. The compensation is real, though: because you pay from taxed income, the benefit is normally paid to you tax-free. Do not let an accountant claim these for you, and do not let the lack of relief talk you out of the cover.

What happens if the insurer fails

Worth knowing before you buy the cheapest quote from a name you do not recognise. Where an insurer regulated by the Prudential Regulation Authority goes under, the Financial Services Compensation Scheme steps in — and the level of protection depends on whether the cover was compulsory. Compulsory classes, including employers' liability and third-party motor, are protected at 100%. Other general insurance, public liability and property cover among it, is protected at 90%. There is no upper monetary cap on either, unlike the deposit protection limit people are more familiar with. It is a reason to check the insurer sits behind a UK-regulated balance sheet, not a reason to pay more for a household name.

Your buying checklist for this week

  1. Read your live client contracts and write down every cover level they demand. Contracts routinely specify professional indemnity at £1m or £2m, and buying below the highest figure any client requires means buying it twice.
  2. Decide which of PI and PL your risk actually is, using the "wrong advice" versus "broke something" test, and price the package as well as the parts.
  3. If you employ anyone, confirm the employers' liability policy is in force today, is at least £5 million, and that the certificate is displayed somewhere staff can reach — a folder they cannot open does not count.
  4. Check the family and single-director exemptions apply to you as you actually trade now, not as you traded last year. Incorporating a family business ends the family exemption on the day the company starts employing.
  5. Check your home insurance for business-equipment and business-visitor exclusions before buying separate contents cover.
  6. Diarise the renewal three weeks early. Auto-renewal quotes are consistently beatable, and three weeks is enough time to move without a gap in cover.

How we help

We make sure every premium is captured and claimed correctly, keep the income protection premiums out of your business expenses where they do not belong, and flag the covers your trade calls for as it changes — the year you take on your first employee is the year this stops being optional. For advice on income protection and life cover we introduce you to Buzz Financial Services, because that is regulated advice and it should come from an adviser rather than an accountant. Fixed fees from £19 + VAT a month. Get started.