Leaving PAYE to Contract: The Cover You Lose on Day One

If you leave employment to contract through your own limited company, you do lose death in service — and you lose it on your final day on the payroll, not gradually. Group life cover is an employment benefit. It belongs to your employer, it insures you because you are their employee, and it switches off the moment that relationship ends. Nothing about incorporating your own company continues it. On day one as a contractor, that cover is simply gone.

It is rarely the only thing that goes. When people ask whether they lose death in service when they go self-employed, the honest answer is broader than the question: a whole bundle of protections attached to being an employee ends at once, quietly, on the same date. Most of it never appeared as a line you paid for, which is exactly why it is so easy to walk away from without noticing.

The better news is that a limited company gives you a route to rebuild the most important pieces — a relevant life policy can act as a one-person death in service arrangement — while a few things cannot be replaced at all. This guide itemises what stops, what your own company can put back, and the parts you should not expect to recover.

The short answer: it all stops on your last payroll day

Employment benefits are contingent on employment. That sounds obvious, but the consequence is sharper than most people expect: there is no tail, no grace period and no run-off. The cover does not wind down over your notice period and then stop. It is in force up to and including your employment termination date, and off the next day.

For death in service specifically, that means the sum your family would have received — typically a multiple of your salary — becomes nil the instant you stop being an employee. If the reason you are leaving is that you are setting up on your own, the gap opens at precisely the moment your income also becomes less certain. It is the worst combination: less financial predictability and less protection, starting together.

This is the same cliff that catches people leaving work for any reason. Someone giving up work to care for a relative loses the identical cover on their last day. Contracting is only different in that you have a vehicle — your company — through which you can deliberately rebuild it.

Everything that ends when the payslip does

Death in service is the headline, but it is worth seeing the full list, because contractors routinely rebuild one piece and forget the rest.

• Death in service (group life). The lump sum for your family on death in employment. Gone on your leaving date.
• Group income protection. The benefit that replaced part of your income if you were off long-term sick. This is often the most valuable thing an employee loses, and the least noticed.
• Private medical cover. Any employer-paid health insurance ends, and a fresh policy of your own may exclude conditions you already have.
• Employer pension contributions. The employer's share of your pension stops. Your company can contribute instead, but only if you arrange it.
• Sick pay. Both Statutory Sick Pay and any contractual sick pay end. As a director you have far more limited access to statutory support.
• Holiday pay and paid leave. There is no paid holiday when you are the company. Time off is time unbilled.
• Statutory redundancy and unfair dismissal rights. These are employee rights. They do not apply to a company owner working through their own business.

None of these continues into work done through your own limited company. That is not a loophole to close; it is simply what leaving employment means. The value of writing them down is that it turns a vague sense of "I should sort out insurance" into a specific list you can work through.

Why your own company changes the picture

Here is the part that surprises people in a good way. When you contract through your own limited company, you are usually an employee and director of that company. You have, in other words, an employer again — yourself. And an employer can provide employee benefits.

That is what makes a contractor's position different from a sole trader's. The company is a separate legal person that can hold policies, pay premiums and provide cover for its staff. You cannot recreate a large group scheme with one employee — that genuinely is too few people for a group death in service arrangement — but you can put in place a policy designed for exactly this situation.

Rebuilding death in service: the relevant life route

The tool most contractors use to replace death in service is a relevant life policy. It is, in effect, a single-employee death in service arrangement. Your company is the policyholder and pays the premiums; the policy is written in trust for your family from the outset; and on death it pays a tax-free lump sum to your beneficiaries through that trust.

The tax treatment is the reason it is used rather than an ordinary personal policy. The premiums are not usually treated as a benefit in kind for you as the employee, and HM Revenue & Customs generally accepts them as an allowable business expense where the cost is wholly and exclusively for the business. Because the payout is held in trust, it normally falls outside your estate for inheritance tax and is paid without waiting for probate. The precise treatment depends on the policy being set up correctly, so this is a case for an FCA-authorised broker who arranges these routinely rather than a do-it-yourself version.

If you want to see what replacing your old cover would involve, you can get life insurance quotes and have the amount set against your actual mortgage and family rather than against whatever multiple of salary your former employer happened to use.

What a relevant life policy cannot do

A relevant life policy rebuilds the death benefit, but it is not a like-for-like copy of group cover, and two differences matter.

First, it is medically underwritten. Group death in service usually covers you with no health questions at all, up to a scheme limit, because the insurer prices the whole workforce together. A relevant life policy asks about your health and prices your individual risk. If your health has changed since you last thought about cover, that is felt here — which is one reason to arrange it sooner rather than later.

Second, it covers death (and usually terminal illness) but cannot include critical illness cover, and it must end before a set age. It is a death benefit, not an all-purpose plan. The income protection and private medical cover you also lost are separate arrangements, bought and priced on their own terms. Rebuilding your protection properly means treating it as several policies, not one.

The parts you cannot rebuild, and the cash-flow gap

Some of what you give up has no clean replacement. Statutory redundancy rights simply do not exist for a company owner. Access to statutory sick pay is far more limited. And the automatic, no-questions nature of group cover — the fact that it insured you regardless of your health — is gone for good, because every policy you now buy is underwritten.

There is also a timing problem specific to working for yourself. Employees are paid whether or not a particular piece of work has been invoiced. A contractor is not. Money owed to your company can still arrive after a death, but it does so through your business rather than landing in a family bank account, and it can be treated as a post-cessation receipt with its own tax handling. That is worth understanding, because a family that assumes "the last few invoices will tide us over" can find the money is neither quick nor simple to reach.

This is why the planning question is not only "what is the lump sum" but "what does the household actually have to live on in the weeks straight after a death". We set that out separately in a piece on what a family lives on before any lump sum arrives, and it applies with extra force to self-employed households, where there is no employer quietly continuing a salary while things are sorted out.

Timing: put the cover in place before you leave

The single most useful thing in this whole article is about sequence. Arrange your replacement cover before your notice runs out, while you are still employed and still have your group cover in force.

Relevant life and personal applications are underwritten, which takes time — days at best, weeks if the insurer wants medical evidence — and cover cannot be backdated to fill a gap. If you leave it until you have set the company up and won your first contract, you run uninsured through exactly the unsettled period when your family is most exposed. Starting the process while you still have a known leaving date and a settled income also keeps the paperwork simpler. If you are moving between arrangements repeatedly rather than making one clean break, the same logic covers irregular and casual work too, such as the death benefit NHS bank staff may not actually have.

You can read the wider context, including the other ways employer cover quietly ends, in our guide to death in service and employer cover.

Scotland and Northern Ireland

The insurance and tax elements here are UK-wide: relevant life policies, the inheritance tax treatment of trusts and HMRC's approach to allowable expenses work the same wherever in the United Kingdom your company is based. What differs a little is employment law. Northern Ireland has its own body of employment legislation, separate from Great Britain, governing redundancy and dismissal rights — the rights themselves are broadly similar, but they sit under different statutes and are enforced through different tribunals.

None of that changes the central point of this page. The protection you are leaving behind is tied to being someone's employee, it ends on your last payroll day across the whole UK, and rebuilding it is a deliberate act you carry out through your own company, not something that happens automatically when you start trading.

Frequently asked questions

What do I lose when I leave PAYE to contract?

Everything attached to employment ends on your final day: death in service, any group income protection or private medical cover, employer pension contributions, sick pay, holiday pay and statutory redundancy rights. None of it continues into work done through your own limited company. The cover stops on your employment termination date, with no run-off period afterwards.

Can my own company replace death in service?

Largely yes, through a relevant life policy. The company pays the premiums, the policy is written in trust for your family, and it works as a one-person death in service arrangement. Income protection and private medical cover can also be arranged, though on different terms. What a single-person company cannot do is set up a group life scheme, which needs several employees.

When should I put the new cover in place?

Before your notice runs out. Personal and relevant life applications are underwritten and take weeks, and cannot be backdated to cover a gap. Arranging it while you still have a settled income and a known leaving date also keeps the paperwork considerably simpler, and means your family is never relying on cover that has ended before the replacement has started.