Sole Trader vs. Self-Employed: What’s the Difference?

Day to day, there is little distinction between self-employment and being a sole trader. You might be asking yourself: what is the difference, and how does it impact me? Below, we explain the meaning of these terms.

Nic Redfern, Kristina Fox Last updated on 26 April 2022.
Sole Trader vs. Self-Employed: What’s the Difference?

For some independent workers, the difference between being self-employed or a sole trader may seem unimportant. In legal and practical terms, they mean the same thing.

If you have complete control over your business, working hours, and sell goods or services for a profit, you are probably a self-employed sole trader, unless you have registered your business as a limited company instead.

What does self-employed mean?

If you are self-employed, you work for yourself and run your own business, and you do not work for an employer. You pay tax through self-assessment, and there is no paid holiday leave or sick pay. For the purposes of tax and employment law, self-employment means you hold full responsibility for the outcome of your business.

You can be self-employed and employed at the same time. For example, if you work full-time in a supermarket and run an online shop in your spare time. You’ll pay tax through self-assessment for your self-employed income, while your employer will deduct tax from your salary as part of the pay-as-you-earn (PAYE) system.

If you’re unsure about your employment status, you can contact HMRC:

  • By phone: call ​​0300 123 2326
  • By post: write to HM Revenue and Customs, Employment Status Customer Service Unit, S0733, Newcastle Upon Tyne, NE98 1ZZ
  • Online: use the Check Employment Status for Tax tool

What does sole trader mean?

Sole trading is a way to run a business. A sole trader is a self-employed individual who is the exclusive owner of their business. Sole trader businesses do not need to register with Companies House. Because sole traders are self-employed, they must pay tax through self-assessment.

Perhaps most importantly of all, the identity of the sole trader is indistinct from the identity of the business. In other words, legally speaking, the two entities are one and the same.

You do not have to submit a Company Tax Return or pay Corporation Tax as a sole trader, so bookkeeping may seem more straightforward than for a limited company. That said, it is important to keep your accounts in order so you can fill out your self-assessment tax return.

All profits after tax are retained by the owner if you’re a sole trader. However, you are also personally liable for debts run up by the business, as well as for any losses made by the company.

Another way to run a business is to register as a limited company instead. One structure may suit your business better than the other, so you may want to seek independent financial advice before making a decision.

» MORE: Can business insolvency affect my personal finances?

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

Being a sole trader and being self-employed are basically the same thing. As a sole trader, you run your business as a self-employed person. It is your responsibility to manage the success of your business.

All sole traders are self-employed. However, if you run a limited company, you’re not seen as self-employed by HMRC. Instead, you’re both the owner and an employee of your limited company.

What are my responsibilities as a sole trader or self-employed person?

Tax and National Insurance

Both sole traders and self-employed individuals are responsible for submitting an annual tax return, as well as for paying income tax on profits and contributing toward National Insurance.

If you are self-employed, you will have a Personal Allowance (currently set at £12,570 for 2022/23). You only pay income tax on profit you make over this threshold. In addition, you will have to pay Class 2 National Insurance contributions if you make more than £6,725 a year, and Class 4 contributions if you earn over £9,881 each year. The amount you have to pay depends on how much money you make.

You can find more details about the National Insurance contributions and income tax you’re liable to pay on Gov.uk, including what to do if you are both employed and self-employed.

Insurance

If your business has employees who aren’t members of your immediate family or are not based abroad, you are legally obligated to take out employers’ liability insurance.

It’s worth noting that there is no requirement for business insurance if you are a single-employee company, unless the profession itself demands a policy be taken out under a regulatory body. However, you may want to consider taking out certain kinds of insurance regardless.

If you are a self-employed sole trader, you may wish to consider taking out public liability insurance to protect you from compensation claims and legal action if a client, or member of the public, was injured, became ill or died, or their property was lost or damaged, during the course of your business activities.

You may also choose to get professional indemnity insurance to cover the cost of compensation if you were negligent or offered bad advice to clients.

» MORE: Do I need business insurance?

Business bank accounts

There are different business bank accounts available depending on your company’s legal status. Sole traders do not need a separate business account and may be able to use a personal current account instead, though it may still be worth having a separate account to help you organise your finances. Read our guide to self-employed bank accounts for more information.

Unlike sole traders, limited companies legally have to open a separate business bank account.

» MORE: How to open a business bank account

How to register as a sole trader

If you have decided that setting up as a sole trader is the best course of action for your business, the process is straightforward. You need to notify HMRC that you are self-employed and that you intend to register for self-assessment to pay tax.

You can register for self-assessment online or by post. To register by post, you must fill in the form online then print it off and send it to HMRC.

Starting out as a small business owner can be daunting, but by practising due diligence, conducting careful research and by understanding self-employment and sole trading, you will set a solid foundation on which to build your company.

About the authors:

Finance Director at NerdWallet UK and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business Read more

Kristina is a writer at NerdWallet. A recent graduate trading French for finance, she has experience creating content for student newspaper Cherwell and an edtech company. Read more

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