Sole trader and self-employed are terms that are often used interchangeably, but they don’t mean the same thing.
In this guide, we’ll go into the difference between sole trader and self-employed and which term might best suit you.
Fundamentally, the differences are outlined in this table:
| Sole Trader | Self-Employed | |
|---|---|---|
| Refers to: | Your business | Your employment status |
| Definition | A business structure where one person owns and operates a business. | A person who earns income without being employed by another person. Used across different business structures, including a sole trader, partnership, limited company, or other structure. |
| Legal Entity | The business and the owner are considered one legal entity. | The individual is the legal entity. |
But let’s break down what this actually means.
The key difference between sole trader and self-employed
From a legal point of view we are comparing two different things: a business structure vs an employment status.
A sole trader is a type of business structure. It means a company that is owned by a single person, or… a sole… trader… if you will. A lot of these terms are kind of in the name, or as Ronseal fans would say, ‘it does what it says on the tin’.
On the other hand, a self-employed person is someone that isn’t employed by a company but works for themselves.
This means they:
- Decide what work you do or the clients that you take on
- When they do the work
- How they do the work
- Where they work
- Don’t pay tax via PAYE
- Don’t get sick or holiday pay
If you are employed, you can’t choose what work you do, as this will be determined by your employer. You will have set working hours during which you are expected to work, and the location will also be dictated by the company you work for.
How you do your work will also depend on the guidelines given by your employer. And your employer pays income tax and NIC on your behalf, so you don’t have to worry about it. If you are off sick, you will still get paid by your employer, and you can go on holiday without losing out on your salary.
While a sole trader is always self-employed, although they can also be employed at the same time by a company, a self-employed person isn’t always a sole trader.
You can be self-employed and run a limited company or a partnership. However, you can’t just be self-employed without any association with a business structure.
So if you are thinking about starting a business, the question isn’t whether to be a sole trader or self-employed. Instead, you need to decide what business you want to run: sole tradership, limited company, or partnership.
Once you have made this decision, your employment status will be easier to determine. If you become a sole trader or set up a partnership, you will be self-employed for tax purposes. If you decide to run a limited company, you will be employed by the company as a director.
Being self-employed as a sole trader
According to government figures, sole traders make up the biggest number of businesses in the UK.
Sole traderships are so popular because they are one of the easiest business types to manage. You don’t have a lot of red tape or documents you need to submit to HMRC.
In fact, the bulk of your legal work will be making sure that your self-assessment tax returns are completed on time, as you’ll be responsible for paying tax on any earnings.
This might sound overwhelming at first, but with a good accounting software, it becomes quick and easy.
Here is what it means to be a sole trader:
- Be fully liability if something goes wrong
- Register for self assessment with HMRC
- Pay income tax on all your earnings
- Paying National Insurance contributions
- Deduct allowable expenses from your tax bill
- Completing and sending your self-assessment tax return every year – on time!
- Keeping detailed records of your business’s sales and expenses
- Hire employees, but you have to register as an employer with HMRC
- Registering for VAT. This one is optional unless your turnover is more than £90,000 a year. Find out more about VAT and why you might want to register voluntarily here.
If you work in the construction industry as a contractor, you’ll also have to register with HMRC for the Construction Industry Scheme (CIS). This scheme allows contractors to deduct payment from subcontractors and pass it along to the HMRC – which then counts as an advance towards their tax.
Subcontractors aren’t required to register for the Construction Industry Scheme, but you will be punished with higher payment rates if you don’t. So, we’d recommend that you sign up.
Examples of sole traders can include:
- Plumbers
- Electricians
- Hairdressers
- Accountants
- Copywriters
- Dressmakers
- Artists
- Tradesmen
- Drivers
And much more, including you!
As with everything, there are advantages and disadvantages to being a sole trader. But most people start out as such and then change to a limited company when the business has grown.
Setting up as a sole trader is also very simple. As all you need to do is register for Self Assessment with HMRC, that’s it.
Being self-employed without being a sole trader
As we pointed out earlier, being self-employed doesn’t mean that you have to be a sole trader. If you want to start a business with someone else, you can register a partnership.
This means that you and your partners share responsibilities for your business. All partners will be liable if something goes wrong, for example, financially.
And all partners will be classed as self-employed for tax purposes and have to register for Self-Assessment. The nominated partner has to file the tax return for the partnership as well.
If you want more protection for your business, you can always register as a limited company instead.
A limited company is a business that’s owned by shareholders (whether that’s one person or 100) and is registered with the Companies House. Unlike a sole trader, limited companies are classed as their own legal entity and come with a range of added benefits, such as:
- Full liability, as you can take out debts and own assets under the company’s name, not yours.
- Better tax breaks by paying more favourable rates than personal tax. You’ll also be able to claim a lot more allowable expenses too.
- Increased professionalism and better financial backing
And more. You can find out about the difference between a sole trader and limited company here.
For tax purposes, you will be classed as employed if you are the director of a limited company. And if you pay yourself a monthly salary, then the company pays your income tax and NIC on your behalf.
However, if you also draw dividend payments, you will have to declare these in a Self Assessment tax return. So even if you have employed status and own a limited company, you might still have to register for Self Assessment with HMRC.
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As you can see, the difference between sole trader and self-employed isn’t that big. Which is why many people use these terms interchangeably.
Most of your responsibilities as a sole trader (or being self-employed!) are basically keeping on top of your bookkeeping and tax. We’ve got a couple of resources to help out here though.
If you want more information, be sure to check out:
- Our guide on how to pay tax as a sole trader in the UK, which includes breakdowns of how much you’ll be liable for and what you’ll need to set aside.
- Our bookkeeping for beginners guide, running through everything you need to know on keeping your books and details in order without letting them pile out of control.
- Reviews and recommendations of the best accounting software for sole traders, allowing you to digitalise and automate your returns and bookkeeping like a pro.
These are great places to get started and do everything yourself. However, if you need some more help or just want to remove the hard work, we’d always recommend speaking to an accountant. Plus, if you want to go for an online accountant, we’ve also got reviews of the best online accountants in the UK here.
Whatever you need, we’ve got your back at Business4Beginners.
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