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Is there a difference between being self-employed or a sole-trader?
If you work for yourself and not for an employer, you are self-employed. If you are self-employed, chances are that you are a sole-trader. If you are the sole owner of your business, you are a sole-trader.
The differences in business types are based on how they are each assessed for tax purposes. Being self-employed is the main type of business structure, alongside becoming a limited company or having a business partnership. Becoming self-employed is the simplest and easiest way to get started in business, as there is much less paperwork and structure that you need to have in place to begin. The main difference of being self-employed rather than a limited company contractor is that you are solely responsible for your liabilities, making you responsible for any business losses or debts.
When you decide to become self-employed, you will need to inform HMRC as soon as possible, within three months of operating, so they can ensure you are paying the right National Insurance contributions (Class 2 NICs) and are registered for self-assessment.
AccountingFrom there onwards, you must ensure that you keep records and the business accounts are kept up to date. It is your responsibility to do this and when HMRC ask for your self-assessment at the end of the financial year, you will need to be able to prove all the profits and spending. You are not required by law to have an accountant, but it is a good idea in order to keep everything up to date.You also do not have to have your accounts audited however if you are looking to obtain a mortgage in the future, it will come in handy when presenting accounts to the bank or lending provider.
National Insurance ContributionsAs a sole trader, you will pay two types of National Insurance contributions, depending on your profits. If your profits are above £6,205, you will pay a set £2.95 per week for Class 2 NICs. Class 4 NICs are paid on profits above £8,424 at a rate of 9%. After you have registered for self-employment, you will be sent a self-assessment notice following the end of that tax year - this runs from 6th April to 5th April each year.
The deadline for submitting a paper copy of self-assessment is 31st October, however many people are now completing their returns online, especially with the Making Tax Digital laws that are coming soon.
FreelancersThere is sometimes a cross-over when it comes to self-employment and that’s when we think about freelancers. They are essentially sole traders in the eyes of HMRC however the main difference is that they generally will not employ another worker, usually working independently and are predominately client-based. Freelancers tend to do ‘gig’ work which is common within the creative / media / consultancy industries. They typically charge a higher rate of pay and often work on a one-off job or short-term assignments. They are also not entitled to sick or holiday pay if hired by a larger organisation, and work is not always regular, therefore their rates of pay are higher to compensate.
HMRC still class a freelancer as a sole trader as they are solely responsible for their own business and are responsible for paying their own tax and national insurance contributions, rather than being paid through PAYE.
Running a business, whether that be freelance, as a sole-trader or self-employed, can take a lot of time away from working ‘in’ the business. And that’s where 2020 Accountancy can help. We offer straightforward accountancy services for small business owners and seek to lighten the load when it comes to the accounting of your business.If you’d like financial advice on running your business effectively and within HMRC guidelines, we’d be happy to help, get in touch for more information.