Income protection insurance remains an important financial safety net for many people across the UK, providing a regular source of money if illness or injury prevents them from working for an extended period. 

This form of cover is intended to replace a proportion of your earnings while you are unable to work, helping you to continue meeting essential bills and everyday living costs while you concentrate on recovery. 

The Mechanics of Income Protection Insurance

Income protection policies are arranged to pay a defined proportion of your usual income, commonly in the range of around fifty to seventy per cent, after an initial deferred period. 

These regular payments continue while you remain unable to work under the policy’s medical definition of incapacity, until the policy term ends, or until you reach the policy’s retirement age. 

The deferred period (sometimes called the waiting period) is selectable on many policies and can be as short as a few weeks or extend to several months, with a correspondingly different premium cost. 

Many policies allow multiple claims over time so long as you meet the insurer’s medical requirements each time. It is important to read each policy’s definition of incapacity carefully, because the tests and exclusions can vary between insurers. 

Who Benefits from Income Protection Policies?

Income protection can be particularly helpful for several groups of people who face the greatest risk from a loss of earnings.

Employees and Self-Employed Individuals

Employees who do not receive substantial contractual sick pay from their employer, or who can expect only statutory sick pay for a limited period, may find that income protection provides the longer-term financial cover they need.

Self-employed people, who typically have no employer sick pay, are often among the most vulnerable and therefore are frequent purchasers of this type of policy. Given recent reforms to statutory sick pay eligibility and rates, it is sensible to check the position with your employer and the latest government guidance when working out whether you need additional cover. 

Those with Financial Dependents

If other people rely on your earnings, for example children, a partner, or elderly relatives, the interruption of your income can cause immediate financial stress for the household. Income protection can help preserve the family’s standard of living by providing regular benefits while you are unable to work.

Homeowners with Mortgages

Mortgage commitments are often the single biggest monthly outgoing for many households. For homeowners with substantial mortgages, having income protection in place can help ensure mortgage payments continue and reduce the risk of arrears or repossession during long periods of incapacity.

Why opt for Income Protection Insurance?

Comprehensive Coverage

One of the core strengths of income protection is that, unlike a critical illness policy which typically pays a one-off lump sum for a list of specified conditions, income protection provides an ongoing income for a wide range of illnesses and injuries that leave you unable to work. Subject to the policy terms and medical evidence required by the insurer, this ongoing nature makes it a more reliable safety net for long-term or recurring incapacity. 

Flexibility in Claims

Many income protection policies offer flexibility in how and when you claim. In many cases you can claim more than once if you have separate periods of incapacity that meet the insurer’s conditions. 

Additionally, some policies include rehabilitation or return-to-work support designed to help policyholders regain employment where possible. The precise features and the availability of ancillary services vary by insurer, so it is important to compare policies and to discuss individual needs with an authorised protection adviser. 

Tax Considerations and Who Pays the Premiums

The tax treatment of income protection benefits depends on who pays the premiums. As a general rule, where you personally pay the premiums from taxed income, benefits received are not treated as taxable income under the usual rules covering sickness and disability policies.

By contrast, where an employer pays the premiums for an employee, benefits are more likely to be subject to income tax, because they are often treated as a continuation of salary. 

Because tax rules can be complex and occasionally change, it is important to check the latest HMRC guidance or to seek specialist advice for your particular circumstances. 

Recent Market and Policy Context (what’s changed and why it matters)

The protection market has been very active in recent years, with record volumes of individual income protection policies sold. This could be due to a high level of claims payments, which underlines both the demand for these products and the role they play in household financial resilience. 

At the same time, the Financial Conduct Authority has signalled increased scrutiny of the pure protection market to ensure products are delivering fair value for consumers. Firms and advisers should therefore be particularly careful to ensure customers are sold suitable cover that meets their needs. 

This evolving regulatory and market backdrop means consumers should take care to compare policy definitions, restrictions and pricing and to seek regulated advice where appropriate. 

It is also important to factor in recent changes to statutory sick pay and eligibility that may affect how much cover you need. In 2024–25 the government introduced reforms that change statutory sick pay rules for the lowest-paid workers (including extending eligibility and adjusting replacement rates in certain circumstances). 

Employers’ contractual sick pay arrangements also vary significantly, so you should check the latest government guidance and your employer’s policy when calculating any shortfall you may face. 

A note from a Protection Professional

Mark Cornes, a mortgage broker and income protection adviser based in Bristol, says: 

“Ultimately, income protection insurance offers invaluable peace of mind; knowing that a substantial portion of your income is secured allows you to concentrate on recovery rather than on immediate financial worries. That in itself can support improved outcomes, both practical and psychological. Speaking to a qualified protection adviser will help clarify which policy features matter most for your personal situation.” 

If you are thinking about cover, it makes sense to consult an authorised adviser who can explain policy definitions, deferred periods, any healthcare-related exclusions and the tax position that will apply in your circumstances.

In Summary

Income protection insurance remains a core component of financial resilience for many people in the UK. This will be particularly important for employees without generous contractual sick pay, self-employed workers, homeowners with mortgages and those with financial dependents. 

It is designed to replace a proportion of your earnings for the period you are unable to work owing to illness or injury, usually after an agreed deferred period. In many circumstances, benefits are paid tax-free when the policyholder has paid the premiums. 

Given recent market developments and regulatory attention, it is sensible to compare policies carefully and to seek regulated advice so you can select a policy that genuinely meets your needs and gives you confidence that you will be supported if you need to claim. 

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Please Note: This article is for general information only and does not constitute personal financial, tax or insurance advice. The Financial Conduct Authority requires communications about protection products to be clear, fair and not misleading, and to make it clear where consumers should seek regulated, personalised advice; for that reason you should speak with an FCA-authorised financial adviser or protection specialist before making any decisions about buying income protection cover, and you should check the precise policy wording and current tax guidance that applies to your own circumstances.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Thomas Oliver UK LLP is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.

Approved by The Openwork Partnership on 20-11-25.