Insurance for Sole Traders

Along with tax and accounting support, insurance is a fundamental product for sole traders, whose businesses and personal assets are left exposed without it.

But as is often the case when it comes to financial services, the world of insurance can be confusing and knowing which cover you might need isn’t always clear.

In this simple guide, we run through the basics and identify the insurance policies you might need for your line of work.

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What is sole trader insurance?

Sole trader insurance offers tailored financial protection to the 4.5m sole proprietors in the UK.

Similar to other types of insurance, these policies offer peace of mind and vital financial protection whether to cover legal fees, compensation or even tax liability following an investigation from HMRC.

Why do sole traders need insurance?

Gone are the days when insurance was seen as a luxury for sole traders. With sole traders facing risks every day when doing business, sole trader insurance is arguably a necessity and, in some scenarios, a legal requirement.

Here are some of the key reasons why sole traders need insurance:

  • Peace of mind: Insurance provides a financial safety net, which gives you and your clients peace of mind and confidence when working together.
  • Legal requirement: While some policies are widely seen as good-to-have, others, like employers’ liability insurance, are required by law.
  • Minimising risk: As a sole trader, you operate with unlimited liability, meaning that personal assets – such as your house – are at risk in the event of financial issues. Insurance minimises this risk.
  • Business growth: With insurance in place, potential clients are more likely to work with you.
  • Access to finance: If and when you need finance to invest in growth, having insurance in place can also make you more attractive to lenders.

What insurance do I need as a sole trader?

Which insurance you need as a sole trader can hinge on several things – from whether or not you have employees, to your line of work and, ultimately, how much protection you want.

These are the most commonly bought sole trader insurances:

Professional indemnity insurance

Sole traders take out professional indemnity insurance, or PI insurance as it's often called, to protect them from professional negligence. By this, we mean claims made against you for loss or damage experienced by a client or third party due to a problem in the service you’ve carried out for them.

Here’s how it could play out:

You’re a marketing consultant and, in a newsletter sent on behalf of your client, you include incorrect information. This results in a financial loss for the client and they take legal action against you.

PI insurance is there to cover the cost of legal fees involved in defending your case, along with potential compensation, up to your level of cover.

Sole traders are often required to have PI insurance by clients.

Public liability insurance

If a client or member of the public has an accident, is injured or dies at a site you’re responsible for – whether your office or place of work – and legal action is taken against you, public liability insurance will kick into action.

Public liability insurance is common for office-based work, while lots of construction companies insist that self-employed tradespeople hold this insurance before engaging them.

Employers’ liability insurance

Employers’ liability insurance protects your business from legal claims made by your employees against you, their employer.

Employers’ liability cover isn’t a choice either. By law, any business with employees is typically required to hold at least £5m of cover. This should be taken out the moment you hire an employee, bring on an apprentice, use volunteers or take on work experience students.

Home insurance

If, like many sole traders, you work from home, you might want to consider taking out a home business insurance policy.

This differs slightly from general home insurance (which will provide some cover) and is designed to pay out should business-specific equipment, like laptops, technology or stock, get lost, damaged or stolen.

Vehicle insurance

All road vehicles need insurance, even if they’re left parked on the street, your driveway or in your garage.

And for sole traders who use their vehicle – whether a car, van or even motorcycle – for work, vehicle insurance is essential.

Known as commercial vehicle insurance, this cover is a legal requirement. While lots of personal vehicle insurance policies factor in the use of the vehicle for ‘commuting’ and ‘social’, commercial vehicle insurance is comprehensive and protects you, your vehicle and others, when driving for work.

Other types of insurance for sole traders

There are plenty of other insurance policies for sole traders. From tax enquiry cover to cyber insurance and even accident insurance or life insurance, there is a wide range of protection available to protect you and your business.

How much does insurance cost for sole traders?

It depends on the policy and the level of cover you’d like, but cover can start from as little as a few pounds per month. The best way to look at sole trader insurance, is that it’s likely to be a lot less than the cost of paying for protection, repairs, replacements, legal fees, compensation and liabilities of your own pocket.

Find out more

To recap and round up, having insurance in place as a sole trader isn’t just a smart or sensible thing to do, it’s often required by law. To learn more about our offering for sole traders, take a look at our sole trader accountancy packages or get in touch.

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