Sole trader vs self employed – what’s the difference?

Deciding to start your own business is a major step that you’ll need to consider carefully. Becoming self-employed has many benefits but there’s a lot to think about.

Before you join the estimated four million self-employed people in the UK, it’s important that you understand how things are structured and the meanings of key phrases.

So, is a sole trader the same as self-employed? Read on to find out what counts as self-employment, the meaning of sole trader, and your business responsibilities.

The following article answers these key questions:

• sole trader vs self-employed – is there a difference?
• can I be self-employed and a sole trader?
• what is the sole trader meaning?
• can a sole trader have employees?
• what counts as self-employment?
• how do you register as a sole trader?
• what are your responsibilities when you’re self-employed?

Sole trader vs self-employed – is there a difference?

It’s important to understand that there’s not really a difference between being a sole trader and being self-employed.

‘Sole trader’ describes your business structure, while ‘self-employed’ is a way of saying that you don’t work for an employer or pay tax through PAYE.

Both terms are often used interchangeably: if you’re self-employed then you’re basically running a sole trader business.

Can I be self-employed and a sole trader?

Yes. If you’re self-employed, chances are you’re considered a sole trader.

But what is a ‘sole trader’? A sole trader is one of the main types of business structure, alongside ‘limited company’ and ‘business partnership’.

It’s the simplest business structure and there’s very little paperwork needed to get started.

As a sole trader, you’re responsible for paying tax on your profits and you’re personally responsible for any losses that your business makes. Read our guide on how to pay tax when self employed for more information.

Meanwhile, a limited company is when you incorporate your business and it becomes its own legal entity.

What is the sole trader meaning?

The sole trader definition is someone who’s self-employed and the sole owner of their business.

Unlike a limited company, a sole trader doesn’t have to register with Companies House or have a director.

For example, if you’re a freelance copywriter, you’re self-employed and would need to register as a sole trader.

Other sole trader examples include running an online shop, doing freelance consultancy work, or working as a self-employed plumber.

Can a sole trader have employees?

Yes, sole traders can have employees as long as they remain the sole owner of the business.

If you’re a sole trader and you want to hire employees, you won’t need to set up a limited company. However, you’ll need to register as an employer with HMRC and submit a PAYE registration form.

Lots of sole traders have people working for them, but make sure you know the difference between a freelancer, employee, and worker as they have different rights. The government website explains the differences between employment statuses.

What counts as self-employment?

The definition of ‘self-employed’ for employment law and tax purposes can be a little complicated. As a rule of thumb, you count as self-employed if you’re responsible for the success or failure of your business, and you decide what work you do and when and how you do it.

This means you pay tax through Self Assessment rather than PAYE and you don’t get sick pay or holiday pay.

If you’re self-employed, you can work for more than one client and you usually submit invoices to your clients to get paid.

How do you register as a sole trader?

Setting up as a sole trader is quick and simple. All you need to do is tell HMRC that you’re self-employed so that they know you need to pay tax through the Self Assessment process.

Bear in mind that you must register for Self Assessment even if you have another job or you’re only doing part-time freelance work.

If you have a side hustle, you’ll need to register to pay tax if you earn above £1,000 a year. Read our guide to second job tax to get started.

What responsibilities do you have after becoming self-employed?

You should tell HMRC you’re self-employed as soon as possible. You’ll then be responsible for:

• completing a Self Assessment tax return by 31 January each year
• paying National Insurance contributions and income tax on the profit you make
• registering for VAT if your VAT taxable turnover exceeds £90,000

Meanwhile, it’s a good idea to keep your business-related receipts throughout the year so that you can deduct any allowable expenses from your profits when you complete your tax return.

If you hire one or more employees, you’re usually legally required to have an employers’ liability insurance policy.

Other insurance covers to consider if you’re self-employed include:

• professional indemnity insurance
• public liability insurance

Although these aren’t required by law, you should check your client contracts and your regulatory body to see if they require you to have a certain level of cover.

More articles and guides for the self-employed

• A guide to going self-employed in the UK
• HMRC penalties – a guide for the self-employed
• Tax year dates and deadlines for the self-employed
• How much business insurance do I need?

Do you have any unanswered questions about the difference between the sole trader meaning and becoming self-employed? Let us know in the comments below.