Sole Trader Vs Self-Employed

Published on Monday January 18, 2021

When you’re going into business, understanding the difference between being a sole trader and being self-employed is crucial. The most popular option in the UK is working as a sole trader, as it’s the easiest business structure to use.

What is a sole trader?

The term sole trader describes the actual structure of your business. While it is someone who is self-employed, it is also a person who is the exclusive owner of their business. You need to register with HMRC as self-employed to pay tax through the self-assessment process.

As a sole trader, the business owner and the business itself are one legal entity in the eyes of the law. This means after paying your taxes, you’re entitled to all the profits. You can take on employees and still remain the sole owner of the business.

Traders

© Monkey Business Images / Shutterstock.com

What is self-employed?

Being self-employed means you’re not employed by anyone else and you don’t pay tax through PAYE. Usually, this means you work for yourself and run your own business, rather than working for someone else.

The definition of self-employed for tax purposes and employment law is that you’re fully responsible for the success or failure of your business, paying tax through self-assessment.

The term describes the way you work, rather than your business’s structure. You can decide what work you do and when. You don’t receive holiday pay or sick pay if you take time off. You can choose one of several legal structures for your business, including being a sole trader. You can also choose limited company or business partnership status.

A limited company functions as a legal entity in its own right, separate from the owner, whose personal finances are protected. Every limited company must have a director and be registered with Companies House. A business partnership is shared between two or more co-owners.

Examples of being self-employed

Responsible or their own taxes, a hairdresser who rents a chair in a salon can work on a self-employed basis. A freelance writer who works alone on the basis of selling individual stories, receiving payment per sale, is self-employed and can register as a sole trader.

A business consultant running their own small business can be self-employed and register as a limited company. A plumber running their own business, who is the sole owner, is both a sole trader and self-employed.

Sole trader or self-employed?

If you’re thinking of becoming a sole trader or going self-employed, choose your trading name first. Then, find out what business records you’ll need to keep, including all your business expenses, VAT records, PAYE records if you have employees and records of your personal income.

HM Revenue and Customs can check on businesses at any time to ensure their records are up to date. If you don’t keep proper records and haven’t filled in your tax returns correctly, you can incur financial penalties.

Similarly, if you don’t file your annual accounts at the right time and pay any money you owe to HMRC, you will incur fines and interest.

Using an accountant

Some sole traders and self-employed business people choose to hire the services of a professional accountant to ensure their accounts are in order.

According to research by SAGE, SMEs in the UK spend an average of 120 hours per year on administration tasks – this is time that could be better spent elsewhere! The report concludes that this time could otherwise be used to analyse performance, prepare new strategies and grow the business.

An accountant can help both sole traders and the self-employed – so you can concentrate on the important task of succeeding in the business world!

Follow Us