- A sole trader is a type of business structure where an individual owns and runs the business themselves.
- Self-employment is an employment status used by HMRC for tax purposes. It applies to individuals whose income is not taxed at source through PAYE.
- The main difference is that all sole traders are self-employed, but not all self-employed individuals are sole traders. Self-employment also includes people who:
- Earn rental income from property.
- Receive capital gains from selling assets.
- Generate income from dividends or interest.
- Operate as trading partners in a business partnership.
These individuals are considered self-employed for tax purposes but do not operate as sole traders.
Sole Trader Explained
A sole trader is a small business structure where one individual is the exclusive decision-maker and owner of their business. There is no formal registration process unless the income exceeds £1,000, at which point the individual must register for Self Assessment. HMRC will then determine if they need to pay Class 2 National Insurance contributions.
This model is often compared to a limited company, which offers limited liability protection. In a limited company, registered with Companies House, the owner’s personal finances and assets are generally protected, and liability is limited to the value of their investment in the business. Unlike a sole trader, who is personally liable for business debts, a limited company separates personal and business finances, reducing financial risk for the owner.
See also: Sole Trader Vs Limited Company.
- A local hairdresser who runs their own salon and is registered as a sole trader with HMRC.
- A plumber offering services under their personal name or business name, but not operating as a limited company.
- A personal trainer who manages their own bookings and pays tax through Self Assessment.
- A self-employed photographer who owns all their equipment and operates as a sole trader.
What does self-employed mean?
Self-employed refers to an individual’s employment status, mainly used to determine how their income is taxed.
A person is considered self-employed if the income they earn from any commercial activity is not taxed at source through PAYE. This includes sole traders and individuals such as company directors who receive income in the form of dividends or benefits in kind. Business owners who earn capital gains also fall under this category. You can use our Capital Gains Tax Calculator to estimate how much tax you might owe on profits from selling property, shares, or other investments. Since these earnings are not taxed through a PAYE reference number, they must be reported through a self-assessment tax return, and the individual may need to pay income tax on them.
All sole traders are self-employed, but not all self-employed individuals are sole trading.
You are considered self-employed for income tax purposes if you earn more than £1,000 in income not taxed at source through PAYE or another tax scheme.
- Rental income earned from letting out residential or commercial property.
- Capital gains from selling assets such as cryptocurrency, shares, or property that is not your main home.
- Dividends from company profit after tax are distributed to shareholders and not processed through payroll.
- Benefits in kind, such as company cars or private healthcare, are not taxed through payroll.
- Partnership income received as profit rather than salaries.
- Investment income, including interest or returns from savings, shares, or other financial products
- Foreign income earned overseas that is taxable in the UK.
These income sources fall under self-employment for tax classification and must be reported through Self Assessment, even though they do not involve running a business as a sole trader.
How to register as a sole trader vs self employed?
Setting up as a sole trader or as self-employed is the first step towards having your income correctly taxed through your Self Assessment tax returns.
- Sole traders register using the CWF1 form or through the Self Assessment registration portal.
- Self-employed individuals who are not sole traders (for example, those earning untaxed income from property or investments) register using form SA1.
Before registering, it’s important to check whether you need to notify HMRC:
- Use this HMRC tool to determine if you need to report additional untaxed income.
- Use this checker to check if you need to register for self-assessment.
Once you confirm you need to register, the process is simple:
- Create a Government Gateway ID and password
- If you are a sole trader, complete form CWF1 for tax and national insurance registration.
- If you are registering as self-employed for other income (such as rental or investment income), complete form SA1
You can do this through your HMRC business tax account:
- Log in and select “Add a tax to your account to get access to a tax, duty or scheme“
- Choose Self Assessment
- Follow the prompts to provide your personal and business details
Self Assessment
HM Revenue and Customs
BX9 1AN
United Kingdom
In both cases, HMRC will issue your Unique Taxpayer Reference (UTR) by post within 15 working days or 21 if you are abroad
What is the main difference between being a sole trader and self-employed?
The main difference is that sole trader refers to a recognized business structure, while self-employed describes an individual’s employment status for tax purposes.
A sole trader runs a business as its sole owner and decision-maker. They must register for Self Assessment if their business income exceeds £1,000 in a tax year.
A self-employed individual earns income that is not taxed at source through PAYE. This can include rental income, investment income, or freelance earnings. If this untaxed income exceeds £1,000, they are also required to register for Self Assessment.
Regardless of structure, both sole traders and other self-employed individuals are personally responsible for their business activities, which is why business insurance is strongly recommended to protect against unexpected claims, liabilities, or losses.
Excellent article! Learning about these differences between sole trader and self employed traders will be helpful for my own Tax planning UK business.