This guide covers the key differences between being a sole trader and self-employed. Learn what counts as self-employment, how to register, and your business responsibilities.
Entering the world of self-employment can seem daunting, but understanding the basics can make a huge difference. The terms sole trader and self-employed are often used interchangeably, but what do they mean? Below we explore the key differences, how to get started, and what responsibilities you’ll have.
Sole Trader vs Self-Employed.
- Sole Trader: Refers to your business structure.
- Self-Employed: Describes your work status—being your boss and paying taxes outside of PAYE.
If you’re self-employed, chances are you’re operating as a sole trader. This is the simplest and most common way to run a business in the UK.
What Is a Sole Trader?
A sole trader is someone who:
- Runs their own business as an individual.
- Takes full responsibility for their profits, losses, and tax obligations.
Unlike a limited company, there’s no need to register with Companies House, and the setup process is straightforward. Examples of sole traders include freelancers, tradespeople, and online shop owners.
Having Employees as a Sole Trader.
Sole traders can hire employees while remaining the sole owner of the business. If you want to hire employees you must:
- Register as an employer with HMRC.
- Submit payroll through PAYE.
It’s worth noting that the different employment types—freelancers, employees, and workers all have different rights.
What Counts as Being Self-Employed?
You’re considered self-employed if you:
- Control your work schedule, tasks, and how you run your business.
- Bear responsibility for the success or failure of your business.
- Pay taxes through Self-Assessment instead of PAYE.
Self-employed individuals often work for multiple clients and issue invoices to get paid. However, they don’t receive employee benefits like sick pay or holiday pay.
How to Register as a Sole Trader
Getting started as a sole trader is simple:
- Inform HMRC: Let them know you’re self-employed to set up Self-Assessment for tax purposes.
- Check Earnings: If you earn over £1,000 a year from part-time work, you must register for Self-Assessment.
Responsibilities of a Sole Trader
Once registered, you’ll have several ongoing responsibilities:
- Submit your Self-assessment tax return annually (by 31 January).
- Pay income tax and National Insurance contributions on your profits.
- Register for VAT if your taxable turnover exceeds £90,000.
- Keep detailed records of business-related expenses to reduce your tax bill.
If you hire employees, you’ll also need employers’ liability insurance.
Insurance Considerations
While not all insurance is legally required, some types can protect your business:
- Employers’ Liability Insurance: Mandatory if you have employees.
- Professional Indemnity Insurance: Protects against mistakes or advice that leads to a loss for your client.
- Public Liability Insurance: Covers you if someone is injured or their property is damaged because of your business.
Check client contracts and industry regulations to see if specific coverage is required.
Becoming self-employed and operating as a sole trader gives you the freedom to shape your own business. However, it’s essential to understand the responsibilities and legal requirements that come with it. If you’re unsure about anything, contact Whittaker & Co. for straightforward, jargon-free advice tailored to your needs.
Become a sole trader: What a sole trader is – GOV.UK
Get your business ready to employ staff: step by step – GOV.UK
Visit our News Hub for the latest – News – Whittaker & Co (whittakerandco.com)
info@whittakerandco.com
+44 (0) 1686 610662
