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What is the difference between being self-employed and a sole trader?

‘What is the difference between being self-employed and a sole trader?’ is a question that we are frequently asked.

The definition of self-employed is someone not employed and paying Income Tax through PAYE.  In other words, you are running your own business and pay your tax due through your personal tax return.

However, it also means that you are fully responsible for the success or failure of your business.

Self-employed defines the way you work not the business structure.  There are three options for this – a sole trader, business partnership or limited company – read more here

As a sole trader you own the business outright.  You and your business are seen as one blended legal and financial entity.  As such you would be personally responsible for any loan, credit agreements or unpaid bills. 

Even though a sole trader can be VAT registered and have employees, there is a perception that this is a smaller operation than a limited company. However, there is a lessened level of paperwork.

In summary, a sole trader is self-employed but you can be self-employed but not a sole trader.

Whichever is the best option for you, there are statutory requirements to register to your business before you start trading.

What is a Sole Trader?

“What is a sole trader?” is a question that we are often asked. There are three key considerations in deciding whether setting up as a sole trader is right for you:

To set up as a sole trader, you need to notify HMRC that you intend to pay Income Tax and National Insurance through a personal tax return. 

If you are not already submitting a person tax return, you will need to register and then file a tax return every year.

You can trade under your own name or you can choose a trading name for your business. 

You do not need to register your name but there are some rules.  Sole trader names must not:

You must include your name and trading name, if you have one, on official paperwork such as invoices, quotes and letters.

If you do opt for a trading name, it is advisable register your name as a trade mark to prevent anyone else using the same name.

You must register for VAT once your turnover exceeds £85,000 in a twelve-month period.   However, you can register voluntarily if it suits your business.  The consideration is who you sell to and whether they can reclaim the VAT.

If you are intending to work in construction industry as a subcontractor or contractor, you will also need to register with HMRC for the Construction Industry Scheme.

Although you are self-employed, your business can have employees paid under PAYE and can register with HMRC for this as and when needed.