A common problem for those who take the leap from employment into being their own boss is wondering how to describe themselves. Am I suddenly a CEO of something? The MD? A freelancer? Something else?
They all exist in the same professional realm, so the terms do overlap but there are nuances between them which are important to note for legal and financial reasons.
Some of the terms we use to describe self-employment actually describe the legal structure of your business, and these have an impact on how you register your business as well as for tax compliance.
It can be quite confusing, so we explain what it means to be self-employed, freelance, or a sole trader, and give guidance on the various tax implications to help steer you in your desired direction.
What does it mean to be self-employed?
As the name implies, being self-employed is where you work for yourself rather than as an employee of someone else. Self-employment means you own your own business and are responsible for your own income.
Self-employed business owners may also employ staff and be responsible for paying their wages (and relevant employee contributions like National Insurance and pension) too.
This can apply to businesses of all shapes and sizes (sectors and scales). Whether you own a boutique marketing agency or you’re a solo plumber, if you own the business and generate income from it, you’re self-employed.
Responsibilities
As a self-employed worker you’re in control of things like the scope of work, setting your pricing and rates, and which clients you want to work with. This level of autonomy is one of the most appealing things about being self-employed versus working for somebody else who calls those kinds of shots.
That said, with freedom comes great responsibility and being self-employed also means the onus is on you to deal with things like invoicing, chasing payments, financial accounts, and taxes. (Unless, of course, you get an accountant to help you out, which we’d always recommend doing if you can afford it!)
Self-employed vs. Freelancer vs. Sole trader
It’s important to note, before we go any further, that sole traders and freelancers are self-employed.
Freelancer and sole trader status are not separate or different from self-employment. The crucial difference is that the term ‘sole trader’ describes a legal structure that you can register the business as. Another type of legal structure is a limited company.
So, someone who is self-employed might be a sole trader or they might have a limited company. In summary:
- Sole trader: A type of legal structure that you use to register the business
- Self-employed: You work for yourself, and you can do this as a sole trader, a limited company, or in a partnership
- Freelancer: Someone who is self-employed (and that can be under any business structure you like). The thing that’s different about freelancers is the way they work.
Who qualifies as a freelancer?
A freelancer is somebody who works for themselves, so in that respect you’re self-employed. Freelancers tend to work remotely, and usually work by themselves although they might also collaborate with others as part of a larger project. Freelancing tends to involve:
- Working for multiple clients or on a variety of projects at once
- Being hired on a retainer basis or for adhoc work and projects, rather than on a set contract length
- Controlling the scope of work and rate of pay, including the payment basis (such as with a day rate or project cost, and how often payments are made, such as with milestone payments or on completion)
- Invoicing clients for payment
- Reporting profits and expenses, and paying Income Tax and National Insurance (NI) contributions
Somebody who is a freelancer might operate as a sole trader or as a limited company. They might also work for an employer at the same time as running their own freelance side hustle.
What is a sole trader?
A sole trader is a self-employed person who works for themselves and owns their own business—and is therefore responsible for earning their own income and reporting it for tax purposes.
The main difference between a sole trader and a limited company is that sole traders have unlimited liability. This means that the business owner’s personal finances aren’t considered to be separate from those of the business itself.
Limited companies, on the other hand, keep the business owner’s personal finances and assets separate. This means they will be protected if the company finds itself facing debt or any other financial problems.
Can you be employed and self-employed at the same time?
Yes, you can be employed and self-employed at the same time. Some people choose to run a business outside of their employment to supplement their salary or invest in another skill or passion.
This is what is often referred to as a ‘side hustle’. According to recent research published by finder.com, 43% of Brits have a side hustle as an additional source of income in 2024.
This self-employment side hustle falls under the umbrella of self-employment but could be under the remit of freelancing, sole trader or owner of a limited company, etc.
How do self-employed people pay tax?
How self-employed people report and pay tax depends on how their business is set up, which is why the point about business structure is important. For instance, being a freelancer doesn’t actually tell you what type of tax you need to pay. The way you set up your freelance business does.
- Sole traders submit Self Assessment tax returns and pay Income Tax on all of the profits they make
- In a limited company the business owner submits a Company Tax Return to report the company’s profits and pay Corporation Tax on them. They’ll also need to report their own individual income that they take from the business.
Head over to our freelancer information hub for more guides, tips, and advice.
