Nearly 3.2 million people in the UK are registered as sole traders (GOV.UK), and millions more describe themselves as self‑employed.

Yet many people are still confused by the difference between the two terms. One is a legal structure. The other is a working status. Understanding both helps you register correctly, avoid tax mistakes, and choose the right setup for your work.

What Does Self-Employed Mean?

Being self‑employed means you work for yourself and control how you earn. You find your own clients, you are not on an employer’s PAYE payroll, and you don’t receive employee benefits such as holiday or sick pay. You decide your hours and manage your own workflow

You must file a Self Assessment and you pay Income Tax and National Insurance on your earnings. The term covers freelancers, contractors, small business owners, gig workers, and sole traders.

What Is a Sole Trader?

A sole trader is a specific legal structure within the self employed category. When you register as a sole trader, you trade as an individual and run the business in your own name. You keep all profits, pay tax on your earnings, and take personal responsibility for business debts. 

You can hire staff if you want to grow, but the business still belongs to you as the individual owner.

Sole Trader vs Self Employed, The Core Difference

The simple difference is that self employed describes your status and sole trader describes your business structure. 

All sole traders are self employed, but not every self employed person is a sole trader. 

For example, a freelancer may be self employed without being registered as a sole trader. A contractor may operate through a limited company, which still makes them self‑employed in everyday language but not a sole trader in legal terms. This is where the confusion usually appears.

Who Needs To Register As a Sole Trader

You must register as a sole trader if your business income from self‑employment goes over £1,000 in a tax year. Some people register earlier to claim expenses or to create a clear business record. If you sell goods, offer services, or plan to earn regularly from your trade, registering as a sole trader helps you stay compliant and organised.

You should register if

• Sell goods or services on a regular basis
• Plan to earn ongoing income from your work
• Want to claim business costs against your profits
• Prefer a simple, low‑admin business structure

Tax Responsibilities As a Sole Trader

As a sole trader, you pay tax on your profits through a Self Assessment return. 

• You handle Income Tax, Class 2 National Insurance, and Class 4 National Insurance. 
• You must keep accurate records, store receipts, and track income and expenses so your accounts reflect the true profit of the business.
• Missing filling or payment deadlines can lead to penalties, which many new traders overlook.

Tax Responsibilities When Self Employed

Anyone who is self employed must file a Self Assessment, even if they are not a sole trader. The process is similar, but the tax you pay depends on your structure. 

A freelancer, contractor, or limited company owner still handles their own tax reporting, manages expenses, and pays HMRC directly. The income sources are different, but the responsibility stays the same.

Common tax tasks

• Tracking income
  
• Recording expenses
  
• Storing receipts
  
• Paying tax by 31 January
  
• Paying payments on account (where required)
  
• Reporting side income

Working as a Sole Trader or Self-Employed: Pros and Cons

When Self Employed Doesn’t Mean Sole Trader

Many people are self employed through other structures. A contractor can work through a limited company. A consultant may operate under an umbrella company. A business owner can be self employed while also running a separate side trade. These people are self employed, but they are not sole traders because their legal setup is different.

Examples

• Trade through a limited company
• Work under IR35 via an umbrella company
• Split income with a business partner
• Run a side business with a different structure

Common Myths People Believe

Many people think freelancers are always sole traders, which is not true. Others believe self‑employment always means low income, which is also incorrect.

Some think sole traders can’t hire staff or register a trading name. Others assume a business bank account is legally mandatory. These myths cause confusion and can lead to poor decisions early on.

Examples

Short scenarios make this easy to understand.

No. 1

A graphic designer works alone. She invoices clients. She files a Self Assessment. She is self employed. If she registers her business with HMRC, she becomes a sole trader.

No. 2

A contractor works through a limited company. He is self employed but not a sole trader. His legal structure is different.

No. 3

A tutor works part time. She earns more than £1,000. She must register as a sole trader.

Conclusion

Understanding the difference between sole trader and self employed helps you stay compliant, plan your tax, and choose the right structure for your work. One describes how you earn. The other describes how your business is set up.

Expert Accounting for Sole Traders and Self-Employed Professionals

Our Birmingham-based Chartered Certified Accountants specialise in supporting sole traders and self-employed professionals across the UK. We handle your Self-Assessment tax returns, identify claimable expenses, provide proactive tax planning, and ensure you never miss a deadline.

Our services include:

• Self-Assessment tax returns
• Expense tracking and bookkeeping
• Tax planning
• HMRC correspondence

Stop worrying about tax. Start focusing on your business.

Book a free consultation or explore our sole trader accounting services

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