What is the meaning of self-employed?
Generally speaking, self-employment means working for yourself and running your own business, rather than being an employee of another business. For employment law and tax purposes, however, the definition of self-employed is that you are fully responsible for the success or failure of your business and you pay tax through Self-Assessment rather than PAYE.
The term self-employment refers to the way you work, rather than your business structure. It means that you decide exactly what work you do and when you do it, though you also won’t receive sick pay or holiday pay for time off.
As somebody who is self-employed, you can choose from several legal structures for your business - sole trader, business partnership or limited company. A ‘sole trader’ is the sole owner of a business, meaning the owner and the business is one combined legal and financial entity; whereas a business partnership works in a similar way, but is shared between two or more co-owners. A ‘limited business’, however, functions as its own legal entity separate from the owner, so their personal finances are protected. Even if the business is run by one person, all limited companies must be registered with Companies House and have a director.
Sole trader vs. self-employed
To summarise, the main difference between sole trader and self employed is that ‘sole trader’ describes your business structure; ‘self-employed’ means that you are not employed by somebody else or that you pay tax through PAYE.
There can be crossover between the two – sole tradersareself-employed, as they run their business by themselves. If you’re self-employed you do not necessarily have to be a sole trader, however, as you can choose from other business structures such as a business partnership or a limited company.
Examples of professionals who areself-employed:
- Freelance writerswho workon a gig basis by themselves are both self-employed and will also be registered assole traders
- Business consultantsrunning theirown small business can registeras alimited company, but beself-employed
- Ahairdresserrentinga chair in a salon on a self-employed basis, so is responsible for their own taxes
- Aplumberwho runs their own plumbing business and is the sole owner isboth self-employed and a sole trader
Responsibilities of self-employment
If you’re working on as a self-employed basis you must informHMRC (external link)of your set up within three months, as you will then be responsible for completing a Self-Assessment tax return each year and paying National Insurance contributions and income tax on the profit you make. If you are starting a limited company you must also register with Companies House.
You may also want to consider purchasing business insurance to protect you from the common risks that come with self-employment, as well as risks associated with your industry. Hiscox’s specialistself employed insurancecan be tailored to include covers such aspublic liability,professional indemnity,office contentsandcyber and data risk.
While these forms of cover are not legally required by businesses in the UK, if you hire one or more employees you are obliged to haveemployers’ liability insuranceto cover claims from employees of illness or injury caused by their work.
