Income Protection for Company Directors Dividends vs Salary

How to prove your total remuneration when applying for executive sick pay

As a company director in the UK, you are the engine of your business. Your vision, expertise, and hard work drive its success. But what happens if an illness or injury stops you from working for months, or even years? How would you continue to draw an income to support your family?

This is a critical question, especially because the way most directors are paid—a combination of a low PAYE salary and substantial dividends—can create a major blind spot for standard financial protection. Many personal income protection plans may only recognise your basic salary, leaving a dangerous gap between the cover you have and the income you actually need.

The good news is that there is a specialist solution: Executive Income Protection. This type of policy is designed specifically for business owners and directors. It allows your limited company to arrange cover that protects your total remuneration, including both salary and dividends.

However, securing this comprehensive cover isn't automatic. Insurers need clear, verifiable proof of your total earnings. This definitive guide explains exactly what evidence you need to provide, how to present it effectively, and how to build a financial fortress for yourself, your family, and your business.

Why Standard Income Protection Can Fall Short for Company Directors

First, let's clarify what a standard Income Protection policy does. It’s a personal insurance plan designed to replace a percentage of your lost earnings if you're unable to work due to illness or injury. For a typical employee with a straightforward monthly salary, this is relatively simple.

The problem for a company director arises from their unique pay structure.

A common tax-efficient strategy for directors is to take:

1. A small PAYE salary, often set at a level that is efficient for National Insurance purposes (e.g., around £12,570).
2. The remainder of their income as dividends, drawn from the company's post-tax profits.

When you apply for a personal income protection policy, the insurer's underwriting team will assess your 'provable' income. With a fluctuating income stream like dividends, they may default to the most stable and easily verifiable figure: your PAYE salary.

Scenario: The Director's Protection Gap

• David is the director of a successful engineering consultancy.
• His total annual remuneration is £100,000.
• This is structured as a £12,500 salary and £87,500 in dividends.
• He applies for a personal income protection policy. The insurer only agrees to cover a percentage of his £12,500 salary.
• The maximum benefit he is offered is around £625 per month.

This amount is completely inadequate to cover his mortgage, bills, and family living costs. David is left critically underinsured, and the financial safety net he thought he was buying is practically useless. This is a common and dangerous oversight for many business owners.

The Solution: Executive Income Protection Explained

Executive Income Protection is the superior solution for company directors. It is a business protection policy, not a personal one, and this distinction is key.

Executive Income Protection is a policy owned and paid for by your limited company. It's designed to provide a monthly income to the business if you, a key employee, are unable to work. The business then uses this benefit to continue paying you a salary.

Here’s how it works in practice:

1. The Company Owns the Policy: Your limited company applies for, pays for, and owns the policy.
2. Premiums are a Business Expense: In most cases, HMRC considers the monthly premiums an allowable business expense. This means they can be offset against your company's corporation tax bill, making it a highly tax-efficient way to fund protection.
3. The Benefit is Paid to the Company: If you make a successful claim, the insurer pays the monthly benefit directly to your company's bank account.
4. The Company Pays You: The company then processes this payment to you, the director, through its PAYE payroll system. This income is subject to Income Tax and National Insurance, just like a regular salary.

Key Advantages for Directors

• Covers Total Remuneration: Crucially, insurers that offer Executive Income Protection are set up to assess and cover both salary and dividends.
• Highly Tax-Efficient: Paying premiums from pre-tax company profits is far cheaper than paying from your personal, post-tax income.
• Higher Cover Levels: These policies often allow you to insure a higher percentage of your income (e.g., up to 80% of gross remuneration) compared to personal plans.
• No Benefit-in-Kind (P11D): Unlike some other employee perks, a correctly structured Executive Income Protection plan typically does not create a personal tax liability for you.
• Protects the Business: The regular income from the policy can also help the business stay afloat, perhaps by funding a temporary replacement to manage operations while you recover.

Proving Your Income: The Definitive Guide for Directors

To unlock the benefits of Executive Income Protection and insure your full salary and dividend package, you must provide a clear and robust paper trail. Underwriters need to be confident that your dividend income is a regular and sustainable part of your remuneration, not a one-off windfall.

Here is the essential checklist of documents and concepts you need to master.

What Counts as 'Provable' Income for Insurers?

Insurers will consider your total remuneration package. This typically includes:

• PAYE Salary: Shown on your P60 and payslips.
• Dividends: The amount you have formally declared and paid to yourself from company profits.
• P11D Benefits: The value of any benefits-in-kind, such as a company car or private medical insurance.
• Director's Loan Account: While less common, some insurers may consider regular drawings from a director's loan account if there's a clear, long-term pattern.

Profits that are retained in the business and not paid out to you as remuneration do not count towards the income you can insure.

The Essential Document Checklist

Be prepared to provide the following. Having these ready will significantly speed up your application.

The 'Regularity and Pattern' Rule: The Most Important Concept

This is the single most critical factor underwriters will assess. They need to see a stable, predictable pattern of remuneration. A director who pays themselves a consistent level of dividends every quarter for three years is a much better risk than a director who takes no dividends for two years and then a single, massive dividend in the third.

How to build a strong case:

• Consistency is Key: Aim to pay yourself dividends at regular intervals (e.g., quarterly or biannually) and in consistent amounts that reflect the company's performance.
• Demonstrate Sustainability: Your company accounts must show that the business can comfortably afford to pay these dividends year after year.
• A 3-Year History is Ideal: Most insurers want to see at least two, and ideally three, years of financial history to establish this pattern.

Common Pitfalls and How to Avoid Them

1. New Businesses (Under 2-3 Years Old): If your company is new, it can be challenging to prove a stable income pattern.
   • Solution: You may need to start with a policy that covers a smaller, more easily provable amount. You can then apply to increase the cover as your business establishes a longer trading history. Some insurers offer special terms for start-ups, so expert advice is vital.
2. Retained Profits: You cannot insure profits left in the business for growth or as a cash buffer. The income must be physically paid out to you.
   • Solution: Ensure your accounting clearly separates retained profit from your personal remuneration.
3. Lumpy or Erratic Dividends: A huge, one-off dividend after landing a big contract will likely be discounted by underwriters.
   • Solution: Work with your accountant to smooth your income flow over time. If your income is inherently "lumpy" (e.g., project-based), a specialist broker like WeCovr can negotiate with insurers who have experience in your sector.
4. Poorly Kept Accounts: Disorganised or unprofessional accounts are a major red flag for underwriters.
   • Solution: Always use a qualified accountant. Their certification on the accounts provides a layer of trust and verification for the insurer.

Executive vs. Personal Income Protection: A Head-to-Head Comparison

Understanding the fundamental differences between these two types of policies is crucial for making the right decision.

While the tax-free benefit of a personal plan seems attractive, the inability to cover dividend income and the lack of tax relief on premiums makes it a far less effective and more expensive option for most company directors.

Real-Life Scenario: How Executive Income Protection Saved a Director's Business

Let's revisit our director, David, but this time, he gets the right advice.

• The Setup: David runs his engineering consultancy, remunerating himself with a £12,500 salary and £87,500 in dividends (£100,000 total). He has a mortgage of £3,500 per month and family living costs of £2,500 per month.

• The Right Advice: David speaks to an expert adviser at WeCovr. They review his company accounts and SA302s for the past three years, which show a consistent pattern of profit and remuneration. They recommend an Executive Income Protection policy.

• The Policy: David's company takes out a policy to cover 80% of his total remuneration.

  • Cover Amount: £80,000 per year (£6,667 per month).
  • Deferred Period: 13 weeks (to match his business cash reserves).
  • Premium: The company pays a monthly premium of £180, which is treated as a business expense.

• The Crisis: A year later, David suffers a serious back injury in a cycling accident and is unable to work. His doctors confirm he will need at least 12 months of recovery and rehabilitation.

• The Safety Net in Action:

  1. After the 13-week deferred period, the policy starts paying £6,667 every month to David's limited company.
  2. His company's accountant processes this as income and runs it through the payroll.
  3. After tax and NI, David receives a net income of approximately £4,700 per month.

• The Outcome: This income allows David to comfortably cover his mortgage and all his family's living expenses. He can focus entirely on his recovery without financial stress. Furthermore, because his personal income is secure, the business can use its cash reserves to hire a freelance project manager to oversee key client accounts, ensuring the business survives his absence.

Without the Executive Income Protection policy, David would have had to drain his personal savings and potentially put his home at risk. His business, starved of its leader and cash flow, may well have failed.

Understanding Key Policy Features

When setting up your cover, you and your adviser will need to make decisions on several key features that determine how your policy works.

• Deferred Period: This is the waiting period between when you first become unable to work and when the policy starts paying out. Common options are 4, 8, 13, 26, or 52 weeks.
  • Adviser Tip: Choose a deferred period that aligns with your business's cash reserves. If your business can afford to pay you for 3 months, a 13-week deferred period is appropriate. A longer deferred period will result in a lower premium.
• Definition of Incapacity: This is one of the most important parts of the policy. It defines what "unable to work" actually means.
  • Own Occupation: The best definition. The policy will pay out if you are unable to perform the material and substantial duties of your own specific job.
  • Suited Occupation: The policy pays out if you cannot do your own job or any other job for which you are suited by education, training, or experience.
  • Any Occupation: The weakest definition. The policy will only pay if you are so incapacitated that you cannot perform any kind of work. Always aim for 'Own Occupation' cover.
• Premium Type:
  • Guaranteed Premiums: The cost is fixed for the entire term of the policy. They are more expensive at the start but provide long-term certainty.
  • Reviewable Premiums: The insurer can review and increase your premiums every few years. They are cheaper initially but can become much more expensive over time.
• Indexation (Inflation-Proofing): This is an option to have your cover amount increase each year in line with inflation (e.g., the Retail Prices Index). This ensures your benefit doesn't lose its purchasing power over time. It's a vital feature for a long-term policy.

Other Essential Protection for Company Directors

Executive Income Protection is the cornerstone of your financial resilience, but it's part of a wider suite of business protection products that every director should consider.

Key Person Insurance

• What it is: A life insurance and/or critical illness policy that pays a lump sum to the business if a key employee (like you) dies or becomes seriously ill.
• How it works: The business uses the money to manage the financial impact of your absence. This could involve hiring a replacement, covering lost profits, reassuring lenders, or repaying a director's loan.
• Who needs it: Any business that is heavily reliant on one or two individuals for its revenue, contacts, or technical expertise.

Shareholder Protection

• What it is: An arrangement, usually involving life insurance policies, that provides the surviving shareholders with the funds to buy a deceased shareholder's shares from their estate.
• How it works: Each shareholder takes out a life policy on the others. If one shareholder dies, the policies pay out to the survivors, who use the cash to purchase the shares. This is underpinned by a legal agreement called a cross-option agreement.
• Why it's vital: It ensures a smooth transition of ownership and prevents shares from falling into the hands of family members who may not be willing or able to contribute to the business. It keeps control with the people who built the company.

Relevant Life Cover

• What it is: A tax-efficient alternative to a traditional 'death-in-service' scheme, perfect for small businesses.
• How it works: The company pays the premiums for a life insurance policy on the director. If the director dies, the benefit is paid via a discretionary trust to their chosen beneficiaries (e.g., their family).
• The benefits: Premiums are an allowable business expense, and the benefit does not form part of the director's lifetime pension allowance. It's an extremely efficient way to provide substantial life cover for your family.

The Application and Underwriting Process

Applying for Executive Income Protection is a more detailed process than buying a standard insurance product, which is why specialist advice is non-negotiable.

1. Fact-Finding & Advice: Your adviser will conduct a thorough review of your personal and business finances. This is where you'll discuss your salary/dividend split and gather the necessary accounting evidence.
2. Market Research: As an independent, FCA-regulated broking firm, WeCovr will search the entire market to find the insurer whose underwriting criteria best fit your specific circumstances (e.g., your industry, age of business, income structure).
3. Application: We will help you complete the detailed application form, ensuring your health, lifestyle, and financial information is declared accurately and fully. Honesty is critical; any non-disclosure can void your policy at the point of claim.
4. Underwriting: The insurer's underwriting team assesses the risk. They will scrutinise the financial documents you've provided and your medical history. They may write to your GP for a report (a GPR) or ask you to attend a nurse screening.
5. Offer of Terms: The insurer will issue their decision. This could be 'standard rates' (acceptance on the terms applied for) or they may apply a 'loading' (higher premium) or an 'exclusion' for a pre-existing medical condition.
6. Putting the Policy in Force: Once you accept the terms, your adviser will help you put the policy in force, ensuring the first premium is paid and your cover is active.

Protecting your income is the single most important financial planning decision a company director can make. Your ability to earn is your most valuable asset, and for a business owner, it's intrinsically linked to the health of your company.

By understanding how to correctly document your salary and dividends, you can secure a robust, tax-efficient Executive Income Protection policy that provides true peace of mind. It ensures that if the worst happens, your focus can be on recovery, not financial survival.

At WeCovr, we specialise in helping company directors navigate this complex area. We'll work with you and your accountant to present your case to insurers in the strongest possible way. As part of our commitment to your wellbeing, all our clients also receive complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app, to support your health goals.

Get in touch today for a no-obligation discussion about your protection needs.

Sources

• Financial Conduct Authority (FCA)
• gov.uk
• Association of British Insurers (ABI)
• Office for National Statistics (ONS)
• NHS

Disclaimer: This is general guidance only and does not constitute formal tax or financial advice. Tax treatment depends on individual circumstances, policy terms, and HMRC interpretation, which cannot be guaranteed in advance. Whenever applicable, businesses and individuals should always consult a qualified accountant or tax adviser before arranging such policies.