The most notable difference between self-employed and sole traders is in the names themselves. The sole trader definition describes the word trader where self-employed doesn’t have to mean that you are necessarily trading in stock or products, but could also just be performing a service that doesn’t require any start-up costs for revenue.
Another way to define the two is in the way you pay your taxes. Sole traders would have to register to pay tax like a business, and self-employed individuals would need to pay PAYE (Pay As You Earn) and hand in their assessments.
When you are a sole trader, you don’t necessarily have to pay overheads. Your business could be home-based, where you are selling stock online and maybe using a warehouse for storage instead of paying rental fees. You do need to register for tax as a business even if you are using your name for the company, and you will be solely responsible if anything goes wrong. Your business registration would still need to be done with HMRC and can be done online or over the phone. The sole trader definition also sets you apart from an LLC because you don’t have any investors or shareholders carrying the bulk of the financial responsibility with you. Your registration would be for a company director to undergo an assessment still, but you do not have to register with Companies house.
Self-employed and taxes
People who operate as self-employed do not have to register their work line as a business at all. They are not required to register their name for trading either. They would, however, need to make sure that they wrote for a unique ten-digit tax number with HMRC and that they have earned under a certain threshold to qualify for returns of their taxes. Invoices and receipts can be used for returns when you are self-employed to cover the expenses that an individual might have incurred to sustain themselves. You can claim anything that you have used to help you work, including telephone bills, traveling expenses, stock or raw material, or your equipment if you are trading in a sector that requires equipment work like hairstyling.
You would need to make quarterly payments which you can claim at the end of the tax year. A portion of the gross income will be paid back to the trader if you qualify for returns after handing in your tax return. One of the best ways to make sure that you always have your invoices is to create an online paper trail that can easily be printed and handed in when you do an assessment. Online invoice apps and paystub generators are great ways to keep track and help you remain on the right side of HMRC.