What’s the difference between freelancer, self-employed and sole trader?

June 22, 2022

What’s the difference between a freelancer, a self-employed person and a sole trader?This might sound like the beginning of a bad joke, but for a lot of newly established business owners this is a wholly valid question. Knowing exactly what type of business you are is crucial when it comes to the tax and legal aspects of your business, so getting to grips with the terms early on can save you a lot of trouble in the future.We’ll be defining what exactly a freelancer, self-employed person and sole trader is, as well as looking at the differences — and similarities — between the terms.

What’s the difference between freelance, self-employed and sole trader?

You may have heard freelancer, sole trader and self-employed used synonymously before, leaving you to wonder if there even is a difference between them.To get to grips with how they differ, we’ll unpack what it means to identify as a sole trader, freelancer or self-employed person, what it means for your business from a tax and legal perspective, and where the overlaps in terminology lie.

What does it mean to be self-employed?

According to HM Revenue and Customs (HMRC), a self-employed person is someone who runs their business for themselves and takes responsibility for its success or failure.

If you’re self-employed, you don’t pay tax through Pay As You Earn (PAYE) (unless you fall under a very specific criteria) and instead will need to pay Income Tax and National Insurance contributions (NICs) on income made through self-employment by submitting a Self Assessment tax return annually.

Self-employed worker responsibilities
File a Self Assessment tax return by 31st January every year
Pay Self Assessment tax bill by 31st January every year
Pay National Insurance contributions and Income Tax on profits
Register for VAT if your VAT taxable turnover exceeds £85,000 (UK VAT threshold)
Store records, such as receipts, to deduct allowable expenses
Take out business insurance relevant to your business operations

Both sole traders and freelancers fall under the self-employment umbrella, although the term can also be used to describe business partnerships and limited companies.This is where the distinctions between freelancer, sole trader and self-employed start to get a bit hazy — while sole traders and freelancers are self-employed, not every self-employed individual is a sole trader or freelancer.

What is a sole trader?

A sole trader is a self-employed individual who is, in the eyes of HMRC, a singular legal entity with their business. As a result, sole traders are able to keep all profits after tax, and are personally liable should anything in their business go wrong.With this in mind, a sole trader is a type of self-employed individual with a specific legal structure determining the tax and legal framework that their business operates under.Sole trader businesses can look like any of the following:

A freelance writer working on a gig-basis for multiple clients

A hairdresser renting out a chair in a studio

An electrician running their own small business

With this in mind, sole trader businesses may vary greatly, but will all have the same legal requirements.

Setting up as a sole trader is the easiest way for business owners to launch their businesses, with some choosing to change from a sole trader into a limited company, partnership or limited liability partnership further down the line.

Sole trader responsibilities

While setting up as a sole trader is the simplest way to get your business off the ground, there’s still a little bit of admin to take care of before getting started.

If you’ve decided that setting up as a sole trader is the best way forward for your business, you’ll need to register as a sole trader with HMRC within the first 3 months of trading. However, unlike limited companies, you won’t need to register your business with Companies House.

Since you’ll be self-employed, you’ll need to file a Self Assessment tax return on 31st January every year. Once submitted, you’ll generate your tax bill for the year, made up of the Income Tax and National Insurance contributions you’ll need to pay HMRC.

You may also need to register for business insurance, depending on the line of work you’re in. Most sole traders will need to invest in professional indemnity insurance and public liability insurance, and sole traders with employees are legally required to have employee liability insurance. To find out more on the business insurance you might need as a sole trader, head over to our guide on sole trader business insurance.

While starting out as a sole trader is the most popular option for new business owners, changing from a sole trader business to a limited company may be more appealing to sole traders who are earning higher amounts. This is down to tax-efficiency — while limited companies only need to pay Corporation Tax on all profits, which at the time of writing is 19%, sole traders earning above £150,000 in a tax year will need to pay 45%.

If you’re not sure which legal structure is best for your business, our Sole Trader vs. Limited Company Savings calculator will work out which business structure could save you the most on tax.

What is a freelancer?

A freelancer is a self-employed individual offering a specialist service, typically working with more than one client at a time. The work they do is usually short-term, and as a result freelancers are more likely to charge hourly or daily rates for their services.Much like a sole trader, freelancers are self-employed workers. However, while the “sole trader” label describes a self-employed individual’s business structure, the “freelance” label refers more to the type of work carried out and the way it’s done so.Freelancing can take on any of the following forms:

Copywriting, editing and proofreading

Marketing, PR and journalism

Photography and videography

Illustration and graphic design

Coding and programming

Translation

Catering

Consulting

Bookkeeping

While all freelancers are self-employed, not all freelancers are sole traders. For freelancers earning above a certain amount, they may find that operating as a limited company may prove to be more tax efficient, or that having unlimited liability may be too risky for them.

It’s also worth noting that not all sole traders are freelancers, either. Whereas freelancers specialise in selling a specific service and tend to operate alone, any small business can be a sole trader business if they pay tax on their through Self Assessment and keep all profits after tax. Some sole traders may even choose to hire employees.

Self-employed vs. sole trader vs. freelancer

Whether it’s finding freelance work or the working out the tax you need to pay as a sole trader, knowing the subtle differences between these terms can benefit new business owners starting out on their self-employment journey.

Here’s where Ember comes in. If you’re not sure what your responsibilities are, where to start or how to juggle them with actually running your business, our automated accounting software and team of in-house accountants can make doing your taxes a lot less taxing.

Rachel Cameron-PotterContent Marketer