As a sole trader you carry the business's risks personally. There is no company sitting between your work and your own house, savings and car — if the business owes a judgement, you owe it. That makes insurance less of an optional extra than it is for a director, and it is one of the few costs where the tax treatment is genuinely simple: most of it is deductible, and one of the covers is the law.
Here is what you actually need, what it costs after tax relief, and the one policy most sole traders assume is a business expense and cannot claim.
Employers' liability: the one that really is the law
Everything else on this page is a commercial decision. This one is a legal duty under the Employers' Liability (Compulsory Insurance) Act 1969, and it starts the moment you employ someone.
- You must be insured for at least £5 million, with an authorised insurer.
- Trading without it can be fined up to £2,500 for every day you are uninsured.
- Not displaying the certificate where employees can see it, or refusing to show it to an inspector, can be fined up to £1,000.
There is one exemption that matters a great deal to sole traders, and it gets missed in both directions: you do not need it if the only people you employ are close family — spouse or civil partner, parent, grandparent, step-parent, child, grandchild, step-child, brother, sister or half-sibling — or if the only person you employ is based outside England, Scotland and Wales. Note the shape of that. It is an exemption for an unincorporated employer, and it does not survive incorporation: move the business into a limited company later and the £5 million duty applies from day one. It also covers only those people, so taking on a single unrelated part-timer puts you straight into the requirement.
The daily fine is the number to sit with. Three months of trading uninsured is not a £2,500 problem.
Public liability: for most sole traders, the first thing to buy
Public liability covers injury to other people, and damage to their property, arising out of your business. If you visit customers, have them visit you, or work in public or on client sites — trades, mobile services, anyone physically out in the world — this is the cover sitting between an accident and your personal assets.
It is frequently also a condition of getting the work at all. Main contractors, letting agents, local authorities, event organisers and most commercial landlords ask for a certificate at a stated minimum, commonly £1 million, £2 million or £5 million depending on the site. Buying the level your contracts require, rather than the cheapest available, is usually the whole decision.
Professional indemnity: if you advise, design or specify
Professional indemnity responds to claims that your advice, design or work was wrong and cost the client money. Consultants, designers, bookkeepers, architects, IT contractors, coaches, marketers and surveyors — anyone whose deliverable is judgement rather than a physical thing.
Two details do most of the work here. First, these policies are almost always written on a claims-made basis: the policy that responds is the one in force when the claim is made, not the one in force when you did the work. That is why cancelling cover the month you retire is a mistake, and why run-off cover exists. Second, several professional bodies and most client contracts specify a minimum limit — so read the contract before you buy the policy, not after.
The situational covers
- Tools and equipment — for tradespeople whose van is their livelihood. Read the overnight and unattended-vehicle conditions specifically; theft from vans is exactly where the exclusions live.
- Product liability — if you make, import or sell goods.
- Business contents and portable equipment — laptops, tools, stock, anything that leaves the premises.
- Commercial vehicle cover — a personal motor policy will not cover business use. If you claim vehicle costs against your profits, the policy needs to match how the vehicle is actually used.
- Cyber — increasingly relevant if you hold client data, and it sits alongside your data protection obligations rather than replacing them.
What it really costs, once tax relief is in
Business insurance premiums are an allowable expense, so the quote is not the cost. The relief is worth more than most sole traders assume, because it comes off both income tax and Class 4 National Insurance.
A sole trader with £38,000 of profit pays £920 a year for public liability, professional indemnity and equipment cover combined. Their profit sits in the basic rate band, so the £920 saves income tax at 20% and Class 4 National Insurance at 6% — a combined 26%, or £239.20. Net cost: £680.80 a year, £56.73 a month.
The same £920 is worth more to a sole trader on £70,000 of profit. Above £50,270 the marginal rates are 40% income tax and 2% Class 4 — a combined 42%, or £386.40. Net cost: £533.60.
Turn it round and it becomes a decision rule: every £100 of legitimate premium you fail to claim costs you £26 at basic rate and £42 at higher rate. That is the number that matters, not the quote.
The one you cannot claim
Income protection — often sold as permanent health insurance, or PHI — replaces your income if illness or injury stops you working. For a sole trader with no sick pay and no employer behind them, it is usually the single most valuable policy on this page.
It is also not a business expense. HMRC's position is explicit: premiums paid by a sole trader or partner to provide life, accident or sickness cover for themselves are not allowable deductions in computing trading profits. The policy protects you rather than the trade, so it fails the wholly-and-exclusively test.
There is compensation on the other side. Because you paid the premiums personally out of taxed income, the benefits are not trading income and are generally received tax-free. So the arithmetic runs the opposite way to everything above: you buy it from post-tax money, and you receive it whole. Budget for it as a personal cost, alongside your National Insurance, rather than as a line in the business.
Buy to your risk, not to the cheapest quote
The cheapest policy that fails when you claim is the most expensive one you will ever buy. Three questions settle most of it:
- What do my contracts require? Read the level and the wording, then buy that.
- What would actually ruin me? For a roofer that is public liability and tools; for a consultant it is professional indemnity; for everyone self-employed it is losing the ability to work at all.
- Have I read the exclusions on the cover I already hold? Business use on a personal motor policy, and unattended-vehicle conditions on tools cover, are where sole traders discover they were not covered.
Then get the premiums into your books properly, so the relief above is actually claimed. Capture them in FreeAgent like any other cost and keep the certificates to hand, because clients ask for them. We flag the covers your trade calls for, make sure the deductible ones are claimed and the personal ones are kept out, and connect you with proper advice through Buzz Financial Services. Get started.
