As an accountant for IT contractors and newly established small businesses, we constantly get asked by our clients that if they need to take employers’ liability insurance. For most of the cases, its yes, you need to take employers’ liability insurance for atleast £5 million. It's the law and you could end up paying £2500 fine every day you are not properly insured if you are an employer.
Also, make sure that you only take insurance from authorised providers. You can find the list of authorised employers’ liability insurance providers here.
It is widely know fact that many new startup small businesses and IT contractors start by employing their family member(s) to keep their business running costs low or for tax advantages. So, if your an IT contractor or a small business with only employee(s) being your family member(s), then you do not have to take employers’ liability insurance.
You can see the extract of the government legislation related to this at Employers’ Liability (Compulsory Insurance) Act 1969