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, what is a sole trader? And what counts as self-employment?
- 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 FAQs
What is the difference between sole trader and self-employed?
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?
If you’re self-employed, chances are you’re considered a sole trader. The terms self-employed and sole trader are often used interchangeably.
A sole trader is one of the main types of business structure, alongside ‘limited company’ and ‘business partnership’.
Self-employed is a more general term that describes your employment status. If you’re self-employed, you work for yourself instead of as an employee and pay tax through Self Assessment instead of PAYE.
What is a sole trader?
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.
What are the benefits of being a sole trader?
Sole trader is considered the simplest business structure and there’s very little paperwork needed to get started.
Some of the other benefits include:
- you have full control over business decisions
- you keep all of your profits (you don’t have to split them with shareholders)
- you don’t have to publicly share your financial details (which limited companies have to do)
However, 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.
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?
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 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.
Read our ultimate guide to going self-employed for more information.
What if I’m self-employed but working for an employer?
There’s no reason why you can’t be self-employed and work for an employer.
This is most commonly done as a contractor or freelancer, meaning you work for them on a project-by-project basis or for a fixed term.
If you’re working as a contractor, it’s important to understand your employment status as this will affect how you pay tax. You can use HMRC’s Check Employment Status for Tax tool.
For example, it’s not always clear if you’re self-employed or an employee if you’re working in a salon and renting a chair.
And if you’re operating through a limited company, you’ll need to understand how IR35 works.
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?
As a self-employed person, your main responsibilities will include:
- completing a Self Assessment tax return by 31 January each year
- paying National Insurance contributions and income tax on your profits
- 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.
Sole trader vs self-employed FAQs
What is an example of a sole trader?
An example of a sole trader is someone runs and owns their own business. A sole trader needs to inform HMRC that they’re self-employed for tax purposes, and open a separate business bank account.
Some examples of businesses that could be sole traders include:
- plumbers
- tutors
- graphic designers
- home bakers
What are the sole trader advantages and disadvantages?
The main advantages of being a sole trader are the simplicity of setting up your business. You’ll also have full control over your decisions, get to keep all of your profits, and don’t have to publicly share your financial information.
The main disadvantage of being a sole trader is that there’s no legal distinction between you and your business. This means if you get into financial difficulty, your personal assets could be at risk.
Do I need to register as a sole trader if I am self-employed?
Yes, if you earn more than £1,000 a year from self-employment then you need to register as a sole trader with HMRC.
When you register as a sole trader, you’ll need to pay tax via Self Assessment by 31 January each year.
It’s important to note that you must register by 5 October after the end of the tax year in which you earned more than £1,000 from self-employment.