What insurances do I need as a sole trader?

Posted on 20th February 2023 by Phil Ainley

What is a sole trader?

A sole trader is a self-employed individual who can either work on their own, or they can be a small business owner which is set up as the sole trader legal structure. This means the individual who runs the business takes sole responsibility for any losses they suffer, but they can also keep all of their business’ profits after tax.

Having sole responsibility also means you take on the liabilities of the business and you do not benefit from the protection offered by the structure of a Limited company.

Cover for your contractual obligations

Many sole traders operate as freelance contractors, and in many cases their contracts with their clients stipulate a minimum level of insurance cover. This typically includes public liability insurance and professional indemnity insurance, especially if the hiring party is a large corporate organisation or a local authority, or if it is an organisation of any size in which you will be required to handle sensitive data or intellectual property.

Better safe than sorry

Those self-employed professionals who don’t work to contracts may want to think about protecting their business, and protecting their customers, based on “what if something happens?”

What if…

There was a fire at my business premises?
A customer fell and hurt themselves while they were on my premises?
My business was broken into and my equipment was stolen?
I was seriously ill for a while and was unable to work?

You can gain peace of mind that your business will be covered in each of these situations if you have right type of business insurance in place. If not, you could face having to pay legal fees and damages out of your own pocket if a claim is made against you.

Things to consider when choosing your sole trader insurance

The business insurance you should consider will depend on your business circumstances, including:

The type of work you do – Are you a desk-based professional or do you perform manual work? Do you build and maintain websites for clients or are you a dog sitter? Different types of work will require different types and levels of cover.
Where you work – Do you work in an office, a warehouse, a shop, a market-stall, or other?
The scale and value of your business assets.
Your annual turnover.
Whether you employ staff.
What is the worst case scenario in the event of an accident, and could you afford to cover the cost of any damages?
What is the best level of cover that you can afford?
Are you a tradesperson? This question is important because business insurance for trades professionals is different to many other professions. Find out more about tradesman insurance here.

What insurance should I consider as a sole trader?

The insurance you will need as a sole trader will differ slightly from those of a self-employed Limited company owner, as some business insurance policies are not relevant to sole traders.

Common types of insurance for sole traders includes:

Public liability insurance – Public liability insurance (PL) is a vital form of insurance for self-employed professionals who have contact with clients and the general public. The policy covers legal costs for defending claims and for compensation awarded to a claimant if your business is found to be at fault, thus providing you with peace of mind that your business will be covered.

Professional indemnity insurance – Professional indemnity insurance provides cover that will pay your legal costs and certain compensation payments that might be due if your client takes legal action against you for alleged errors you’ve made when providing professional services, advice or designs that have caused your client a financial loss.

Employers’ liability insurance – Sole traders can still need to hire staff. If you employ people, you are legally obliged to hold employers’ liability insurance. Employers liability insurance (EL) is business insurance protection that covers the cost of defending or settling a claim against you from an employee who has suffered injury or disease as a result of the work they do for you.

Tradesman insurance – Trades can be high risk professions to both yourself and potentially to your clients and members of the public. As such, accidents can happen resulting in injuries to fellow on-site tradespeople and property can be damaged. Our tradesman insurance offers comprehensive industry-specific cover for a range of risks faced daily by tradespeople.

Other types of insurance for a sole trader to consider includes:

Legal expenses insurance – Receiving a letter calling you up for jury service is something that a lot of people crave. However, if you are self-employed this can potentially cause a few issues. If you are contracted to work for a client or clients, then you would need to negotiate whether or not they will allow you to temporarily leave your contract to attend jury service. If so, it could be without pay. If you do not work on a contract basis, but rather provide a service to customers, then you could be without income for at least two weeks, if not more if a case you’re sitting in extends beyond the standard jury service period.

Legal expenses insurance can provide cover for jury service attendance costs among other legal scenarios such as tax investigations, criminal defence and landlord property disputes. The policy can also cover legal costs in defending a HMRC IR35 investigation. Remember, if you are a sole trader you are exempt from IR35 so this benefit cover will only apply if you have switched to become a Limited company.

Occupational personal accident insurance – As a self-employed professional it could be wise to ask yourself how you would cope if you had an accident at work that stopped you from being able to do your job. Could you afford a significant lay-off without income? If your work puts you at risk of an accident, then personal accident insurance could be worth considering. Personal accident insurance provides you with a monetary benefit when injury or death is caused by an accident. If you suffer an accident and are admitted to hospital, or worse, left permanently and totally disabled, personal accident insurance can protect you and your family financially.

[Click here to get a quick online quote for your insurance]

Changing from sole trader to limited company

There may come a time when you consider switching to a Limited company structure, especially if your business grows, your turnover increases, and you need to employ staff.

Switching from sole trader to limited company can have its advantages. We look briefly at sole trader v limited company in the table below to make the comparison easy to understand:

Sole Trader v Ltd Company
Sole Trader		Limited Company
Personally liable for the business. The individual has less of a security net. Personal assets are at risk if the business is sued or falls into debt.		Ltd company liability provides protection for your personal assets. Your personal assets are kept separate if the business is sued or falls into debt.
You have to set up as a sole trader (if you earn more than £1k per annum) by registering for Self Assessment.		You have to register your Limited company at Companies House.
You can keep all of the profits you make.		Profits are subject to corporation tax.
Less tax efficient. Tax is 40% on earnings over £50,271. 45% over £150,000. National Insurance contributions (NIC) between 2% and 9%.		Corporation tax set at 19% regardless of what the company earns. Income Tax and NIC only paid on salary, not dividends.
Sole traders pay themselves by withdrawing cash from the business. These are called ‘drawings’. Those personal withdrawals are counted as profit and are taxed at the end of the year. Set aside a percentage of your earnings in a separate bank account throughout the year so you have money to pay the tax bill when it’s due.		Payment via salary plus dividends.
Claim tax relief on your expenses.		Claim tax relief on your expenses.
No need to go through official procedures to access the money you make as a sole trader.		An official director’s meeting need sot be held to take any dividend payments.
Director’s Fiduciary Responsibilities do not apply to sole traders.		You have legal responsibilities called Director’s Fiduciary Responsibilities.
Your business name can be used by another entity.		Your business name is protected.
You’re not obliged to publish any information about your business.		General public can access information about your business online at Companies House.
		Potentially build enhanced trust with customers as a Limited company.
The individual is in complete control and solely responsible.		More people are responsible for the success of the business.
Less paperwork. Self Assessment once per year.		More paperwork and forms to complete monthly, quarterly, and annually.
Accountant’s fees are typically low for sole traders.		Accountant’s fees for Limited companies are typically higher than for a sole trader.