Sole Trader vs Self Employed: What's The Difference?

Working for yourself is exciting as it offers you the flexibility to make decisions, select work hours, and control your earnings. One of the common forms of self-employment is being a sole trader, and the two terms are viewed differently. So, can all self-employed people call themselves sole traders? Let us understand when we can call ourselves sole traders and when we are self-employed.

Experlu guide today describes the difference between self-employed and sole traders.

Table of contents

Definition for sole trader and self-employed
The key difference between sole traders and self-employed
Responsibilities as a sole trader and a self-employed person
Should I be a sole trader or self-employed?
How do you register as a sole trader?
Final thoughts!

Definition for sole trader and self-employed

Sole trader

A sole trader is the legal structure of your business. You can also operate your business as limited companies, partnerships, or limited liability partnerships. This means a self-employed individual owning their own business can choose to operate as a sole trader.

All sole traders are self-employed individuals. They are the only owners of their businesses and share all the financial and legal responsibilities between business and personal life.

Such individuals must register themselves for self-assessment with HMRC for tax purposes.

Self-employed

Anyone who owns their own business can call themselves self-employed. They have the flexibility to choose a business structure that may or may not be a ‘sole trader’.

All self-employed individuals are not sole traders. They can operate their business as partnerships, limited companies, or LLPs. But, like sole traders, they need to file their self-assessment with HMRC every year for tax purposes.

The key difference between sole traders and self-employed

The main difference between sole traders and self-employed is that the first is a business structure, and the second is how you are employed. All sole traders can call themselves self-employed, but not all self-employed people can call themselves sole traders.

Self-employed people operating as sole traders own their own businesses and aren’t employed by other companies. They don’t receive a salary but can draw money from their business.

Responsibilities as a sole trader and a self-employed person

As a self-employed person, you must inform HMRC about your employment as soon as possible. You will then need to

Complete annual self-assessment tax return by 31 January with proper tax calculations
Pay correct income tax and National Insurance Contributions NIC to HMRC
Register for VAT if your taxable income exceeds the VAT threshold of £90,000

You must prepare for your tax return filing throughout the year. This includes keeping all your bills and receipts in place and checking if you are eligible for certain tax deductions. For example, if you earn less than £12,570, you don’t need to pay any tax on it for 2024-25. But for any earnings above that threshold, you must pay income tax on your profits.

Sole traders need to follow the country’s accounting and tax regulations and stay compliant with legal requirements. You and your business will be considered the same entity legally if you operate as a sole trader. So, for any legal issues or financial problems in business, you will be held personally responsible.

Should I be a sole trader or self-employed?

If you operate as a sole trader, you are already self-employed. But, if you are self-employed, you can consider operating as a sole trader.

If you want to start with a simple business structure, ‘sole trader’ is the best choice. Here, you will be 100% responsible for any business losses or debts and payment of taxes and NIC to HMRC.

However, if you earn over £100,000 per year, you must register your business as a limited company.

How do you register as a sole trader?

The process of registering your business as a sole trader is easy. You need to inform HMRC about your self-employment and that you want to register for self-assessment tax return filing. Once you receive your government gateway ID and password, you can file your self-assessment tax return and pay taxes online. For the right tax and NIC calculations, you can use a self employed calculator.

Final thoughts!

If you have decided to become self-employed, ask an accounting expert if you can register your business as a sole trader. There are multiple other choices for operating your business in the UK. However, if you are working as a sole trader, make sure you register for a self-assessment tax return and pay your taxes to HMRC on time. Additionally, you must follow the accounting and financial standards in the country and stay compliant with legal regulations.