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.
Well, let’s jump straight into it.
What is a sole trader?
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’.
At the start of 2021, it was reported that over 3.5 million sole traders exist in the UK. They’re one of the most popular company formation types, making up 59% of the private business sector.
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 taxes are completed on time, as you’ll be responsible for paying tax on any of the profits you make.
Examples of sole traders can include:
And much more, including you!
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What does being self-employed mean?
Self-employment is an employment type and means working for yourself. This includes:
- Deciding what work you do or the clients that you take on;
- When you do the work;
- How you do the work.
If you’re self-employed, you’re your own boss. Which has a lot of great benefits and advantages to it.
However, it also means that you’re under different legislations to those who are employed by someone else. When you’re self-employed, you’re entirely responsible for your own income. There’s no sick or holiday pay, or a regular PAYE wage each month.
You instead get paid for your work and are taxed on these earnings through self-assessment tax. If you haven’t done so already, you must register as self-employed with HMRC here.
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What is the difference between sole trader and self-employed?
The main difference between sole trader and self employed is that they’re both types of different business categories.
- Sole trader is a type of company structure, which relates to the business as a whole.
- Self-employment is a type of employment, which relates to you personally.
Generally speaking, there’s a lot of overlap between the two terms, which is why they might be used interchangeably. Both terms describe someone working for themselves – and you can be both at once.
Do you have to register as a sole trader if you’re self-employed?
No, you don’t have to register as a sole trader if you’re self-employed.
Sole traders don’t have to register under companies house, so the only requirement you have is to make sure that you’ve filed for self-assessment tax with HMRC. And of course, pay your taxes.
As we pointed out earlier, being self-employed doesn’t mean that you have to be a sole trader. 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 advantages and disadvantages of being a limited company over a sole trader here.
Just remember, you don’t have to make a final decision today. If you register as a sole trader, you can always change to a limited company at a later date. Or, you could just stay self-employed with no labels.
How do you register as a sole trader?
There’s no formal registration process to set up as a sole trader. It’s one of the many perks that the company structure has to offer.
If you want to set up as a sole trader, the most important thing you need to do is register for self-assessment tax through the HMRC. And yeah, that is the same process that you would have done if you were self-employed anyway.
As well as registering for self-assessment tax, there are a few other responsibilities that you’ll need to keep on top of, including:
- Keeping detailed records of your business’s sales and expenses;
- Completing and sending your self-assessment tax return every year – on time!
- Paying Income Tax on your profits;
- Paying Class 2 and 4 National insurance;
- Registering for VAT. This one is optional unless your turnover is more than £85,000 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.
Recommended course for sole traders:
- How to get organised for doing your own tax return
- How to find your way around the HMRC website
- How to complete your tax return
- How to answer the HMRC questions that are hard to understand when you’re not an accountant
- Plus much, much more!
Can you name your business as a sole trader?
If you’re a sole trader, you can either do business under your own name or choose a name for your business. This name doesn’t need to be registered with Companies House, but you do need to include them on all official paperwork that you produce, such as invoices and letters.
There are restrictions over what you can name your business though. If you’re a sole trader you can’t:
- Include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’ in the name, as you are not registered as those company structure types.
- Use offensive or ‘sensitive’ words. And yes, that does include the ‘F’ word.
- Use an existing trademark. For good measure, we’d recommend checking the name you want against the list of registered trade marks before you start using it and make yourself liable for a lawsuit.
- Suggest a connection to the government or local authorities, unless you get permission to do so. For example, if you want to use ‘Accredited’ in your company’s name, you need permission from the Department for Business, Energy and Industrial Strategy (BEIS).
If you want to make sure that no one else steals your brilliant new name, you can always register the name as a trademark yourself.
So, check out the tips below and choose the perfect business name for your company. We are going to take you through several steps that will come up with a broad range of company names. you can then simply choose the one you like best.
Can a sole trader have employees?
Yes, you can absolutely have employees as a sole trader.
As we pointed out earlier, a sole trader is a company type that is owned entirely by one person. In most cases, it tends to be only the owner working for the company, but there’s nothing stopping you from taking on employees as long as you remain the sole owner of the business.
However, in order to take on employees, you’ll need to register as an employer with HMRC, submit a PAYE registration form and get your payroll system up and running. We’ve got more information on how to set up a payroll system here, but it boils down to making sure you have the correct information for your employees and pay them a wage each month with the correct tax deductions.
Although you’ll be self-employed, your employee won’t be. So that means that they need to get a monthly wage with their tax and national insurance contributions already factored in.
If you’re after some extra hands, take a look at our guide on how to recruit employees for a small business without paying a fortune. You can thank us later.
Need help with your tax?
Yeah, 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 wanted 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.