Self employed? Build a financial safety net

‘I learned the true value of getting income protection cover’: Self employed? Build a financial safety net

Quitting the nine-to-five and becoming your own boss is a dream for many – and in recent years more workers than ever have been taking the leap. 

There are more than four million self-employed workers in the UK, while the number of small businesses rose by 8 per cent in the second quarter of this year, compared with the same period in 2020. However, when you shift to self-employment, you lose the financial safety net that an employer provides if you fall ill and cannot work. 

That doesn’t mean your financial wellbeing is in jeopardy – you just have to protect yourself.

Planning ahead: Katie Beardsworth has taking out an income protection policy high on her to-do list


Katie Beardsworth, 35, has taking out an income protection policy high on her to-do list. She experienced the value of such cover when she was growing up and her mother became ill with Meniere’s disease, then breast cancer, and was unable to work. 

Katie is the self-employed founder of two music companies, Polyphony Arts and Mixtape Music Makers CIC, and lives with her husband and four-year-old son in North Tyneside. She plans to take out a policy to help maintain her household income were she ever unable to work. 

Katie’s mother, Anne, claimed a monthly income for 15 years on her income protection policy with Canada Life, after she had to stop working as a self-employed barrister.

‘Mum took out the policy because she was the main wage earner and my dad was 19 years older than her, and already semiretired,’ says Katie. ‘She wanted to be sure we could keep paying our bills if she became ill. 

‘She had expected to be caring for my dad in his later years, but in the end it worked out the other way around.’ 

Save for a nest-egg 

Self-employed incomes tend to fluctuate, in contrast to the regular monthly pay cheques that employees receive. 

To help you smooth over the peaks and troughs in your earnings, try to build up a nest egg. 

Put the money in an interest-earning savings account that is easily accessible. 

Take out cover

If you are unable to work for more than a few months, savings are unlikely to be sufficient to live on. After all, statutory sick pay is not available to self-employed workers – only to those with an employer. 

You will need to find an alternative way of covering your mortgage or rent and other essential costs. This is where insurance can prove invaluable. 

Critical illness cover pays a lump sum if you are diagnosed with certain serious illnesses. 

It’s also worth noting that some employers pay a lump sum to beneficiaries if you die while working there. An alternative for the self-employed is taking out life insurance. 

Income protection pays out a proportion of your income if you cannot work due to poor health or an injury. Most policies cover coronavirus and the effects of long Covid. 

Maintain income

Income protection tends to pay out between 50 and 70 per cent of your regular income if you cannot work, either for a set period or until you reach retirement age. 

When you’re self-employed, proving an accurate assessment of your income to an insurer can be tricky. However, a rising number of policies are designed specifically with fluctuating incomes in mind. 

The insurer LV= launched a mortgage and rent cover policy last month for self-employed and flexible workers providing up to £2,000 a month for a maximum of two years. You don’t have to work a certain number of hours or show proof of income to be eligible, but the benefit must be no higher than your housing costs. 

Breathing Space from British Friendly works in a similar way and pays up to £250 a week. It doesn’t have a minimum working hours requirement, but policyholders need to prove their income. Other policies require people to work a minimum of 16 hours a week, but are designed for those without a regular income. 

Short-term policies include Nationwide’s Illness and Injury Insurance, Aviva’s Living Costs Protection, and Mortgage Safe from MetLife. 

What it costs 

The price of income protection is based on factors including your age, profession, lifestyle and health. 

For example, a 32-year-old could pay between £14 and £35 a month for £1,000 a month of cover until they retire, while a 45-year-old could pay between £20 and £70 a month for £1,500 a month of cover, according to insurance broker LifeSearch. 

You can often lower monthly premiums by delaying when the policy starts to pay out. This may be a good option if you know you could cover your expenses out of your savings for a few weeks or months.


Self-employed workers are just as entitled to tax relief on their pensions as employees. This means that for every £80 they put in a pension, the Government will top it up to £100. Higher-rate taxpayers only need to put £60 into a pension for it to be topped up to £100. 

But unlike employees, offered workplace pension schemes, self-employed workers must open and manage a pension themselves. 

Stakeholder pensions must meet Government requirements, such as limiting fees charged. Another option is a self-invested personal pension. 

Rosie Richard at wealth manager Hargreaves Lansdown says: ‘A Sipp gives you flexibility. You pay regular monthly amounts and add payments as and when you can.’ 

A Lifetime Isa is another option, which offers a 25 per cent tax free bonus on everything you are able to save, up to a maximum of £4,000 every year. This can be a good choice for basic-rate taxpayers, and is available to savers under the age of 40.