What business insurance do you legally need when you are self-employed?

What business insurance do you legally need when you are self-employed?

What business insurance do you legally need when you are self-employed?

Less than most people expect. If you work alone and do not drive for work, there is usually no insurance you are legally required to hold. Business insurance for the self-employed is mostly a commercial decision, not a legal duty.

Two things do carry a legal requirement. You must have employers’ liability insurance as soon as you become an employer, and you must have motor insurance to drive a vehicle on UK roads. Professional indemnity and public liability cover, the two policies freelancers are asked about most, are not required by law for most people. They are usually required by a client contract or a professional regulator instead.

That distinction matters, because the two kinds of obligation carry very different consequences. Missing a legal requirement is an offence with a fine attached. Missing a contractual one costs you the work.

Which insurance does UK law actually require?

Employers’ liability insurance is the main one. You must take it out as soon as you become an employer, and the policy must cover at least £5 million. You also have to display the certificate somewhere your employees can see it, which can be a physical workplace, your website or an intranet, and show it to an inspector who asks.

The penalties are set per day rather than per offence. You can be fined £2,500 for every day you are not properly insured, and a further £1,000 for failing to display the certificate or produce it on request. Your insurer also has to be authorised, which you can check on the Financial Conduct Authority register.

Source: Employers’ liability insurance (GOV.UK)

The second requirement is motor insurance. You must have it to drive your vehicle on UK roads, and third party cover is the legal minimum. This catches more self-employed people than they expect, because a personal policy often excludes business use. If you drive to client sites, deliver goods or carry tools, check what your policy actually covers rather than assuming.

Source: Vehicle insurance (GOV.UK)

Do you need employers’ liability insurance if you are the only director?

Usually not. A company that employs only its owner is exempt where that person also owns at least half of the issued share capital. A single director who holds all the shares in their own company therefore falls outside the requirement.

There are two other exemptions. You do not need the cover if the only people you employ are close family, meaning a spouse, parent, grandparent, step-relation, child, grandchild, sibling or half-sibling. Nor do you need it for someone based outside England, Scotland and Wales.

Be careful with the word employee here. What counts is the substance of the working relationship, not the label on the contract or how someone is taxed. Deducting tax and National Insurance, controlling where and how the work is done, supplying the equipment and refusing a substitute all point towards employment. Someone genuinely in business on their own account, working for several clients with their own kit and a right to send a substitute, generally does not. If you take on your first person and are not certain which side of the line they fall, that is worth checking before the work starts rather than after.

Source: Employers’ liability (compulsory insurance) law: a guide for employers (HSE)

Why do clients ask for professional indemnity and public liability cover?

Because they are protecting themselves. Professional indemnity insurance covers claims that your advice or work caused a client a financial loss. Public liability insurance covers injury to a member of the public or damage to their property arising from your work.

Neither is compulsory under general law for most self-employed people. They become effectively mandatory in two situations. The first is a client contract that names a policy and a minimum level of cover, which is common in consultancy, construction and public sector work. The second is a professional regulator, since bodies governing solicitors, architects, accountants and financial advisers set their own compulsory minimums for members.

So the honest answer to whether you need them is that it depends on who you work for. Read the contract before you buy a policy, because the cover level a client specifies is often higher than the one you would have chosen.

Can you claim business insurance as an allowable expense?

Yes, where the policy is for your business. HMRC lists insurance under the financial costs you can claim if you are self-employed, and gives public liability insurance as an example of a policy that qualifies.

Source: Expenses if you’re self-employed: legal and financial costs (GOV.UK)

The underlying test is purpose. HMRC’s own guidance puts it as a question of what is insured and whether the policy was taken out for the purposes of the trade. A policy covering business risks is deductible. A personal policy is not, and a policy covering both needs apportioning.

There is a related point worth knowing. Where a premium is deductible, money paid out under that policy is normally taxable as trading income. A payout is not free money, and it belongs in your accounts. HMRC also refuses a deduction for fee protection insurance where the cover extends to negotiating extra tax caused by careless or deliberate errors.

Source: BIM45500: Insurance: general (HMRC internal manual)

What is insurance premium tax and does it affect what you claim?

Insurance premium tax, usually shortened to IPT, is a tax on insurance premiums. The standard rate is 12% and has been since 1 June 2017. A higher rate of 20% applies to travel insurance, insurance on mechanical or electrical appliances, and some vehicle insurance.

IPT is built into the price your insurer quotes rather than added at the checkout like VAT, so the figure on your schedule is what you pay. It is not VAT and does not behave like it, so do not treat an insurance premium as a VAT-bearing purchase when you prepare a return. For the purposes of your accounts, the premium you actually paid is the cost you record.

Source: Insurance Premium Tax rates (GOV.UK)

A worked example

The following is illustrative only and is not a prediction of anyone’s position.

Priya is a self-employed marketing consultant working through her own limited company. She owns all the shares and has no staff. Because she is the only employee and holds more than half the share capital, she is exempt from employers’ liability insurance.

Her largest client’s contract requires £1 million of professional indemnity cover, so she buys a policy. She also drives to client offices, so she extends her motor policy to include business use. The professional indemnity premium is a cost of her trade and goes into the company’s accounts as an allowable expense. The motor policy covers both business and private journeys, so only the business proportion can be claimed.

In her second year Priya takes on a part time assistant. From that person’s first day she needs employers’ liability insurance of at least £5 million and has to display the certificate. Nothing about her own status changed. Becoming an employer changed it.

Frequently asked questions

Is public liability insurance a legal requirement for sole traders?

No, not as a matter of general law. It becomes necessary when a client contract or a professional body requires it, and many sole traders who work on other people’s premises find that it is asked for as a condition of getting the work.

Do I need employers’ liability insurance for a subcontractor?

It depends on whether the relationship is really self-employment. A genuinely independent contractor with several clients, their own equipment and the right to send a substitute is outside the requirement. Someone you control, equip and pay like an employee is likely to be inside it, whatever the contract calls them.

Are insurance payouts taxable?

Where you claimed the premium as a business expense, a payout under that policy is normally treated as trading income and taxed accordingly. The two sides go together, which is why it is worth telling your accountant when a claim is settled.

Can I claim insurance I bought before I started trading?

Possibly, if the cost was incurred for the purposes of the business. Pre-trading expenditure has its own rules and the position depends on the timing and the policy, so bring the paperwork rather than assuming either way.

Does my home insurance cover me for working from home?

Often not, or not fully. Standard home policies frequently exclude business equipment and visiting clients. This is a question for your insurer rather than your accountant, but the answer can change what cover you need to buy.

How WV4 Accountants can help

We are accountants, not insurance brokers, so we do not recommend policies or providers. What we can do is make sure the decisions around them are handled properly.

1. Checking whether someone you have taken on counts as an employee, which determines whether employers’ liability insurance applies to you
2. Treating business insurance for the self-employed correctly in your accounts, including apportioning policies that cover both business and private use
3. Handling insurance payouts in your accounts and on your tax return
4. Reviewing pre-trading costs when you are setting up
5. Preparing accounts and returns for sole traders and limited companies

If you are taking on your first employee, or you are not sure how a policy should be treated in your accounts, we are happy to talk it through. There is no pressure and no charge for an initial conversation.

Important note: This article provides general information. Tax treatment depends on individual circumstances. Current HMRC guidance should be checked before action is taken.