Business Insurance for IT Contractors
Understanding Insurance Obligations for UK IT Contractors
Navigating the world of business insurance can be confusing for IT contractors. While some policies are mandated by law, others are often required by clients or simply recommended for prudent business management. Knowing the distinctions is essential for protecting your company and maintaining client relationships.
Essential Insurance Types: What Do You Really Need?
Let’s clarify the main categories of insurance relevant to IT contractors:
| Insurance Type | Legal Requirement? | Typical Client Requirement | Key Purpose |
|---|---|---|---|
| Employers’ Liability | Sometimes* | Frequently | Covers workplace injuries/illness for employees |
| Public Liability | No | Often | Protects against third-party injury/property claims |
| Professional Indemnity (PI) | No | Very Often | Covers professional errors/omissions |
| Tax Investigation (IR35 etc.) | No | Rare | Covers cost of HMRC/tax investigations |
*Employers’ Liability is required if you have employees (not just directors). See below for exclusions.
Step-by-Step: Assessing and Arranging Your Cover
1. Identify Your Business Structure
If you are a limited company with only one employee who owns at least 50% of the shares, or a sole trader with no employees (or only family members as employees), you are likely exempt from compulsory employers’ liability insurance.
If you hire others, you must have employers’ liability insurance (minimum £5 million cover; most insurers provide £10 million).
2. Review Client Contract Requirements
Most clients will expect you to hold, at minimum, professional indemnity and public liability cover. Review each contract carefully.
Some contracts stipulate all three main types (PI, public liability, and employers’ liability).
3. Evaluate Your Own Risk and Preferences
Even if not required, consider cover for peace of mind. Claims—even rare ones—can be financially devastating.
Tax investigation insurance is a growing consideration, especially for those exposed to IR35 or other HMRC scrutiny.
4. Obtain Quotes and Documentation
Shop for insurance with reputable providers. Bundled policies covering PI and public liability are often competitively priced for contractors.
Retain documentation as proof for clients and for your own records.
Troubleshooting: Common Scenarios and Clarifications
I’m a contractor with no employees. Do I need employers’ liability insurance?
Not legally, provided you meet the criteria above. However, some clients may still request it contractually.
What if I use subcontractors or provide a substitute?
The IR35 principle of substitution means you may occasionally engage others. Employers’ liability may be advisable in these cases, depending on contract wording.
Is public liability insurance expensive?
For most IT contractors, premiums are low because the perceived risk is minimal. Cover typically starts at £1-2 million but can be increased as needed.
Do umbrella company contractors need their own insurance?
Generally, umbrella companies provide group cover for PI and public liability. Always confirm with your provider.
What about tax investigation (IR35) insurance?
This is not a legal or client requirement but protects against the expense of a tax enquiry. Particularly relevant for those contracting outside IR35 rules or with historic risk.
Why Prudent Contractors Take Out Insurance
Fulfilling Contractual Obligations:
Without proof of insurance, many clients will not allow you to start work.
Protecting Against Financial Loss:
Claims can arise from client disputes, accidental damage, or public incidents. Insurance shields your business, and by extension, your livelihood.
Demonstrating Business Status for IR35:
Holding business insurance is often cited as evidence that you are genuinely self-employed and operating as a business—a factor HMRC may consider.
Market Competitiveness:
Having robust insurance can set you apart in a crowded market, reassuring clients of your professionalism.
At-a-Glance: Insurance Requirements Table
| Scenario | Employers’ Liability | Public Liability | Professional Indemnity |
|---|---|---|---|
| Ltd company with one director, no employees | Not required | Client-driven | Client-driven |
| Ltd company with employees | Required | Client-driven | Client-driven |
| Sole trader, no employees or only family | Not required | Client-driven | Client-driven |
| Umbrella company employee | Provided by umbrella | Provided by umbrella | Provided by umbrella |
Next Steps for UK Contractors
Review your current insurance arrangements.
Check every new contract for specific requirements.
Seek quotes from specialist contractor insurance providers.
Keep your policies up to date and retain proof of cover.
If using an umbrella company, verify their group insurance details.
Remember: while not all types of business insurance are required by law, prudent contractors protect themselves, their clients, and their professional reputation by maintaining adequate cover.
Further Reading and Resources
