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

What is the difference between a sole trader and being self-employed?
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    Whether you’re working for yourself currently or plan to in the future, you’ve likely heard the terms self-employed and sole trader.

    While both are used interchangeably, being a sole trader is a particular type of self-employment, while anyone that works for themselves and pays their own taxes falls under the ‘self-employment’ umbrella.

    Here’s what you need to know…

    What is a sole trader?

    A sole trader is a self-employed professional who is the sole owner of their business. For example, if you are a freelance copywriter or plumber, you would be a sole trader.

    You need to register with HMRC as a self-employed individual, submit tax returns and pay taxes yourself instead of everything being handled by a company you work for.

    What can I do as a sole trader?

    As a sole trader, you are the sole owner of your own business. Whatever field you are in, you can take on clients and customers and provide a range of products and services.

    As a sole trader, you could work in a particular profession, such as marketing or graphic design, or provide services as a plumber or electrician. You could also run an online shop as a sole trader.

    Can I have employees?

    As a sole trader, you can have as many employees as you need, but it’s important that you register with HMRC as an employer and submit your PAYE registration.

    It’s an excellent first step to decide whether you want someone working for you as an employee, a contractor or a worker, as each has different requirements. You can learn about different employment statuses here.

    Can I work with different clients?

    There are no limits to the number of clients you can work with as a sole trader. Many self-employed people use an invoicing system to request payment from many different clients, particularly in fields where you may work for multiple people each week – such as in trades like painting or cleaning.

    Do I need to register?

    If you’d like to be self-employed, it’s essential to register with HMRC as a sole trader when you reach that decision. As you have to ensure you meet your tax obligations through Self Assessment, getting yourself set up sooner rather than later can prevent confusion.

    Registering as a sole trader is free, and no extra steps are required for this type of self-employment.

    What is self-employment?

    Self-employment means you’re responsible for the failure or success of your business, with control over the actions you take and the work you do.

    Anyone considered self-employed by HMRC pays their tax through Self Assessment, and you won’t get sick pay or holiday pay as you would in regular employment.

    What responsibilities do I have if I’m self-employed?

    If you choose to work as a self-employed sole trader, it’s important you complete your registration with HMRC as mentioned above.

    Beyond that, you’ll also be responsible for all of the following:

    • Ensuring your Self Assessment tax return is completed by the 31st of January every year
    • Paying all necessary income tax and National Insurance contributions for profits
    • Registering for VAT if your turnover is higher than £85,000
    • Getting the correct coverage for employer’s liability if you have employees
    • Keeping track of your finances (books) overall to ensure you’re on track

    Do I need to handle my finances myself?

    When you’re self-employed, there’s no safety net of an employer to handle finances for you. However, this doesn’t mean you have to manage your finances solo.

    You can use specialised software that automates many of the accounting tasks required for self-employed businesses and take steps such as weekly bookkeeping or opening a business bank account to make your finances more manageable.

    Can I hire an accountant if I’m self-employed?

    If you like to idea of being self-employed but the thought of managing your tax and finances is daunting, hiring an accountant is the ideal solution.

    Many accountants work with self-employed individuals to carry out bookkeeping, provide reports and manage the Self Assessment tax return process each year. This support can give you time to focus on other areas of your business.

    Is there any difference between sole trader vs self-employed?

    The terms sole trader vs self-employed are often used interchangeably. In reality, whether you’re in a partnership, working as a sole trader or as a private limited company, you’re considered a self-employed individual.

    If you’re navigating your first year in self-employment or you’d like advice on your tax and finances as a sole trader, WIS Accountancy can help. Our family of businesses supports our clients in business insurance, mortgages and accountancy from one, reliable source. Call us on 0203 011 1898 or fill out our online contact form to get in touch with our expert team.

    FAQs

    Is sole trader and self-employed the same in the UK?

    Sole traders are a subcategory of self-employment in the UK, alongside other options such as business partnerships and private limited companies. If you’re a sole trader, you’re self-employed, but if you’re self-employed, you don’t strictly have to be a sole trader.

    Is it worth registering as a sole trader?

    If you’re earning money as an individual, you must register as a sole trader or other self-employed business to ensure you meet your tax obligations. This requirement applies if you earn more than £1,000 from self-employment within a single tax year.

    Do I pay myself a wage as a sole trader?

    Sole traders don’t get a traditional wage. Instead, you get a ‘drawing’, which is where you can take any profit within the business as yours. Unlike formal companies, there’s no need for PAYE processes when paying yourself.

    Do I need a separate bank account as a sole trader?

    You’re not required by law to separate your business and personal finances – but it might make it easier to keep track. A separate business account makes it easier to understand which payments in and out of your account are related to work expenses and income when you submit your tax Self Assessment.

    Read more about the responsibilities of business owners here:

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