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Is there a difference between being self-employed and being a sole trader?

2-minute read

Is there a difference between being self-employed and being a sole trader?
Jade Wimbledon

Jade Wimbledon

5 February 2016

Sole trader or self-employed? Unclear of the difference between the two? Read on for a brief explanation.

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

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What counts as self-employment?

The definition of ‘self-employed’ for employment law and tax purposes can be a little complicated, but 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 in order to get paid.

What is a sole trader?

A sole trader is basically a self-employed person who is 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, I’m a freelance copywriter, which means I’m self-employed and I’m registered as a sole trader. This applies to many types of business, whether you’re running an online shop, doing freelance consultancy work, or working as a self-employed plumber.

How do you register as a sole trader?

Registering as a sole trader is a lot less daunting than it sounds: it just means telling 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.

Responsibilities of self-employment

You should tell HMRC you’re self-employed as soon as possible. You’re then responsible for completing a Self Assessment tax return each year and paying National Insurance contributions and income tax on the profit you make. 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. You also need to register for VAT if you expect your takings to be more than £85,000 a year (Editor's note: as at 6 April 2018).

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 and 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.

So… is there a difference between being self-employed and being a sole trader?

To sum up, 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 usually applicable: if you’re self-employed then you’re basically running a business as a sole trader, whether you think of yourself as a business owner or not!

Find out more about sole trader insurance.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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