Starting a business can feel like stepping into a whole new world with its own language. One of the most common areas of confusion is understanding the terms ‘sole trader’ and ‘self-employed’. Are they the same thing, or are they different setups? Let’s break it down for you. In this guide, we’ll explain the difference between being self-employed and a sole trader, walk you through how to register, and share some helpful tips for success.
What does sole trader mean?
A sole trader is one of the simplest ways to run a business in the UK. It’s a business structure where one person owns and manages the entire operation. This structure is especially popular with freelancers, tradespeople, and small-scale entrepreneurs because it’s straightforward to set up and offers plenty of flexibility. When you’re a sole trader, you’re personally responsible for the business’s finances, including any profits, taxes, and debts.
How do you register as a sole trader?
Setting up as a sole trader is quick and simple. Here’s what you’ll need to do:
- Register with HMRC for self-assessment: This is how you report your earnings and pay taxes. You can register online through the HMRC website.
- Provide your National Insurance number: HMRC will need your National Insurance number as part of the registration process.
- Get your Unique Taxpayer Reference (UTR): Once you’ve registered, HMRC will send you a UTR. This is unique to you and is required for filing your tax return.
- File an annual self-assessment tax return: Each year, you’ll need to report your income and expenses through a self-assessment tax return.
- Skip the paperwork for a company structure: Unlike limited companies, you don’t need to create governing documents like a memorandum or articles of association.
💡Top tip: Filing deadlines are important to avoid penalties. If you’re filing online, your self-assessment tax return must be submitted by 31st January following the end of the tax year. If you’re doing a paper return, the deadline is earlier - 31st October.
💡Editor’s insight: “Keep track of your earnings and expenses throughout the year to make your self-assessment process much easier. Tools like spreadsheets or accounting software can help, or you could work with an accountant to ensure everything is accurate and submitted on time. Late filings come with penalties, so it’s worth staying organised!”
Pros and cons of being a sole trader
| Pros ✅ | Cons ❌ |
| You make all the decisions | You are personally responsible for business debts |
| There are fewer legal formalities than other structures such as limited companies | You may pay more in tax compared to limited companies, particularly if profits are high |
| You keep all the profits after taxes | Raising capital can be difficult without shareholders or partners |
| Unlike limited companies, your business information is not publicly available |
What does self-employed mean?
Being self-employed refers to anyone who works for themselves and earns an income. This is instead of being employed by a company. It’s a broad category that includes sole traders but can also apply to partners and owners of limited companies. You can learn more in our guide to self-employed vs limited companies.
How do you register as self-employed?
To register as self-employed:
- Follow the same steps as registering as a sole trader by registering for self-assessment with HMRC.
- Inform HMRC of any changes in your employment status each tax year.
Pros and cons of being self-employed
| Pros ✅ | Cons ❌ |
| You can choose your working hours and clients | You won’t receive paid holidays, sick pay, or a pension from an employer |
| Many self-employed individuals work across different projects and industries | Earnings can change from week to week |
| You can claim expenses to reduce taxable income | You are responsible for filing taxes and keeping accurate records |
What’s the difference between being self-employed and a sole trader?
The terms 'self-employed' and 'sole trader' are often used at the same time, but they're slightly different. In short, 'self-employed' is a broader term for anyone who is not employed by another company, while 'sole trader' is a unique business structure.
| Sole trader | Self-employed |
| A type of business structure where one person owns and manages a business | This describes someone who earns an income independently, not through employment |
| Must register with HMRC for self-assessment as a sole trader | Includes sole traders, partnerships, and even limited company directors |
| Focuses more on how the business is set up | Describes how an individual earns their living |
💡Editor's insight: "I find that people don’t always realise that if you are a sole trader, you are self-employed. But if you are self-employed, you're not necessarily a sole trader. For instance, if you are in a partnership, you are self-employed and not classed as a sole trader. So it depends on your type of business when looking at sole trader vs self-employed.”
Re-cap: Is being a sole trader and self-employed the same thing?
While related, self-employed refers to a person’s working status, and sole trader is a business structure. Understanding this distinction helps you to know your legal responsibilities and how to report your taxes. If you plan to work for yourself, you need to choose the right business setup. Whether as a sole trader, partner, or limited company director, you need to make sure your business complies with UK law.
Final thoughts
Navigating the terms sole trader and self-employed can be confusing at first, but they help you to understand how to run your own business. Knowing these differences will help you make informed decisions about registering your business.
Looking for legal support? Get in touch today for a free quote and to see how one of our small business lawyers can help your business.
References
- Find your UTR number by Gov.UK
- Limited companies by Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant. Bear in mind that tax rules can change and will differ based on your circumstances.