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If you think being a sole trader and self-employed are the same thing, think again. While the two share similarities, there are subtle differences that can make all the difference. 

At the heart of the matter, a sole trader may be self-employed, but a self-employed worker might not be a sole trader. In this guide, we explain why this is the case and why it matters.

What does it mean to be self-employed?

The term self-employed describes anyone who primarily works for themselves. You would also be classed as self-employed if you had a side hustle in addition to being an employee.

Going self-employed makes you your own boss. You aren’t answerable to an employer and have more control over your working life than employees. This means you decide when you want to work, but it’s not all fun and games. Your business reputation and earning potential rely on self-motivation and not letting down customers and clients. Also, you must register with HMRC and declare your income each year, even if you earn below the taxable threshold.    

What are the pros and cons of being self-employed?

There are several upsides and downsides to being self-employed. 

Pros

• You are your own boss 

• You pick and choose projects you want to work on

• You can concentrate on work that you enjoy

• You decide when you work

Cons

• You don’t get holiday or sick pay 

• There are no workplace benefits, such as health insurance or a pension, unless you pay for them

• Your income is dependent on how much work you secure, which can be sporadic

• You must ensure you put enough aside for tax

What is a sole trader?

A sole trader is a self-employed person who owns a business in its entirety. Legally, sole trader status means that the business and its owner are one and the same. This has certain implications that distinguish a sole trader from other self-employed workers. For instance, as a sole trader, you’re entitled to all profits after tax, and personally liable for any losses or debts your business incurs.

What are the benefits of being a sole trader?

There are several pros and cons of setting up as a sole trader, many of which chime with those enjoyed or endured by the broader self-employed workforce.

Advantages

• You’re the boss, meaning you can make decisions without seeking the approval of higher-ups, partners, shareholders or directors

• Working for local authorities and councils can be more straightforward for both parties, as it can be quicker and easier to get permits or licences as an individual business owner 

• You use the self-assessment system to report your earnings to HMRC and don’t pay Corporation Tax

• It’s easier and cheaper to register as a sole trader than as a Limited Company 

Disadvantages

• You’re personally liable for all business debts and losses, meaning your credit report could suffer if the business runs into trouble

• It can be hard to get a loan, due to the more fluid nature of your business

• Scaling up may involve moving to a more complicated and costly business structure, such as becoming a Limited Company

• If you become unable to work as a result of injury or illness, your business may struggle to remain afloat

How do sole traders and the self-employed differ?

More than four million people work on a self-employed basis in the UK, but not all of them are sole traders. What sets sole traders apart from other self-employed people is the way they run their business and, potentially, how much they earn. 

Earnings

Your annual income can affect whether you’re self-employed or a sole trader. For example, if you earn more than £1,000 a year, you must register as a sole trader, whereas you don’t need to if you just earn a few hundred pounds a year from a side hustle.

Legal distinction

Unlike other forms of self-employment, including partnerships, a sole trader owns and manages their company on their own. There is no legal distinction between owner and company, which means all profits after tax go into their pocket. They also bear personal responsibility for all debts. This means that your creditors can sue you personally for money you owe and seize both business and personal assets. 

Business structure

Just to clarify, you can be self-employed and have a limited company, although technically, you’d be an employee of your own company. This may seem like splitting hairs, but it’s important for tax reasons because as a limited company you’d be subject to Corporation Tax. It also dictates how you address National Insurance contributions.

You can also run a limited company and operate as a sole trader at the same time. But both entities must be separate, with different sets of accounts and clients. This means you would run two companies - not one company that’s split in two, or overlaps in any way.  

What are the other main types of self-employed businesses?

There are several other business structures open to the self-employed, including: 

• Limited company - this structure allows you to keep your personal and business assets separate, meaning you’re not personally liable for business debts 

• Partnership – you and one or more other people set up a business, with each party taking a share of the profits and responsibility for any debts

• Limited liability partnership – a hybrid structure with elements of a limited company and a partnership. This type of business ringfences each partner's personal assets from any business debts