[Closed] whats the difference between 'sole trader' and 'self employed'?

I don’t know the ins and outs, but he’s not self employed. More like a supply teacher being employed through an umbrella company. Does he get sick pay, paid holidays?

I'm a sole trader...I don't sub contact so I suppose I'm self employed

^^^ This sounds very dodgy. If he is self-employed he should be making his own SA tax returns based on his earnings. If the boss is 'paying his tax' he should also be paying employer NI etc. Then there is IR35...

get a UTR from HMRC and invoice for his work, keep track of expenses. complete annual tax return on-line and pay NI

get his mate to do the same and invoice him too perhaps?

https://www.hiscox.co.uk/business-insurance/faq/what-is-the-difference-between-self-employed-and-sole-traders
Edit-
From this link (first hit on Google) sole trader is to do with how the company is set up. Self employed is how you pay your tax. You can be self employed and not be a sole trader (I am self employed but in a partnership for example) or you can be both at the same time. It’s not either or. I’m struggling to think of when a sole trader wouldn’t be classed as self employed for tax purposes?

Construction Industry Scheme innit.

https://www.gov.uk/what-is-the-construction-industry-scheme

What johndoh said.

He's not self employed is he.

essentially sole trader and self employed are mostly the same thing. Sole trader just refers to the fact that the business is just you. Effectually all sole traders are self employed.

and they take the tax off his wage and pay it to HRMC themselves.

Really....Has your lad not given them his UTR? Get advice from the Gov. site about CIS

Could be CIS?

https://www.gov.uk/what-is-the-construction-industry-scheme/a >

Edit: beaten to it multiple times 🙁

As I understood it self employed is used as a catch-all term. You can be self-employed and paid via PAYE, depends how closely the government is looking at that particular industry. For example, it's very difficult to be a .ltd company or sole trader working in TV. I'm a freelancer/self-employed, but don't have a "company". On the upside, I have no liabilities as a result.

Sole trader means you're not a limited company, so you would be liable for the companies losses as there's no distinction between you and it. As a Limited company, they're separate entities, so if the shit hits the fan then the company is wound up but you aren't personally liable for it's debts. This would be particularly relavent if you worked in construction, because if you'd installed cladding on a high rise as a sole trader then you'd now potentially be personally liable for the remediation and lose everything.

You can be self-employed and paid via PAYE

Yup. And not just in the construction industry. I have been in this situation before... and I "think" @binners is at the moment... at least he was when going into the pandemic.

I’m a freelancer/self-employed, but don’t have a “company”.

That's fine but is all your work for the same company?

Construction is different. As above, construction industry scheme.

The jist of it is that if you are subbing you can't really be fully self-employed and fully manage you taxes unless you go ltd. You still have some tax management to do just a big chunk is taken at source. You end up having tax stopped at source. Different if you go directly to the public you don't need to be ltd and can be self employed.

That’s fine but is all your work for the same company?

No.

Sole trader is a type of self-employment. The other being a partner in a partnership.

Sounds as though he already is a sole trader/self employed but with only one client.

Tax deduction at source is to do with Construction Industry Scheme and is largely independent of what type of entity you are (self emp., ltd co, etc.) but if you are a sub-contractor in the construction industry the contractor is obliged to deduct tax at source and pay over to HMRC to be reconciled at the end of the tax year.

Useful link: https://www.gov.uk/employment-status/selfemployed-contractor

If he'd interested in setting up on his own, have a read through here with him in the first instance...

https://www.gov.uk/browse/business/setting-up

Then if he's going to use an accountant, they will advise on the particular details in his case.

Does he have a UTR (unique tax reference number). Does he or an accountant file a self assessment? If neither of the above he’s not self employed or a sole trader.

The CIS (construction industry scheme) requires a UTR. Basically the person or business you’re sub-contracting to has to stop tax at source ON LABOUR ONLY and pay it directly to HMRC using your UTR so they know who’s paid what. You don’t need to be LTD or VAT registered for any of this. You then file a self assessment annually and either claim back over paid tax, or send them the balance if underpaid. Basically they don’t trust people in construction to pay their tax, so take it at source.

tinas up there ^^^ got it right; if you're a sole trader any business debts are not ring-fenced from your personal assets so you are personally liable for business debts which the business cannot cover.
Limited company is a self-contained legal entity so the business and the individual are completely separate.

But he wants to be a painter. Doesn’t need to be LTD for that. Other than be liable for a dodgy paint job which might need to be redone, he’s unlikely to do anything that might cause him to be financially liable for anything if well insured for public liability, other than a builder going bump n him and taking him for some labour and a few tins of paint.

Does he get sick pay, paid holidays?

no.

The CIS (construction industry scheme) requires a UTR. Basically the person or business you’re sub-contracting to has to stop tax at source ON LABOUR ONLY and pay it directly to HMRC using your UTR so they know who’s paid what. You don’t need to be LTD or VAT registered for any of this. You then file a self assessment annually and either claim back over paid tax, or send them the balance if underpaid. Basically they don’t trust people in construction to pay their tax, so take it at source.

this sounds like him. he'll have a UTR and he also fills in a self assessment form each year with expenses and the like.

Sole trader means you’re not a limited company, so you would be liable for the companies losses as there’s no distinction between you and it. As a Limited company, they’re separate entities, so if the shit hits the fan then the company is wound up but you aren’t personally liable for it’s debts. This would be particularly relavent if you worked in construction, because if you’d installed cladding on a high rise as a sole trader then you’d now potentially be personally liable for the remediation and lose everything.

ah interesting. i can see the sole trader vs ltd company then, just not sure where 'self-employed' fits into that, or whether it even makes any difference.

From this link (first hit on Google) sole trader is to do with how the company is set up. Self employed is how you pay your tax. You can be self employed and not be a sole trader (I am self employed but in a partnership for example) or you can be both at the same time. It’s not either or. I’m struggling to think of when a sole trader wouldn’t be classed as self employed for tax purposes?

which bears that out i think, that it doesnt make a difference.

If he’d interested in setting up on his own, have a read through here with him in the first instance…

https://www.gov.uk/browse/business/setting-up

Then if he’s going to use an accountant, they will advise on the particular details in his case.

Useful link: https://www.gov.uk/employment-status/selfemployed-contractor/blockquote >

thanks, ive linked him to this thread so he can read them at leisure.

EDIT: also, would it be more problematic setting up as a partnership than sole trader?

EDIT EDIT: just reading the below thanks

 

Others have covered the tax situation, but this:

he’s also said that one of his mates has expressed an interest in teaming up with him. that to me would spell danger, as what happens if they fall out, but might it be a good idea if they need capital to get going?

He's got various options. Lets say your son wants to be the boss and him mate just work for him - he can do that either as a Sole Trader or as a Ltd Co. (Most people would suggest if you have employees Ltd is a good idea to protect yourself).

If they want to do it together then they could form a partnership (and there are various structures for doing that, including some which are different if he's north of the border), or they could both be shareholders in a Ltd Co. An accountant (or solicitor who specialises in company stuff) would explain the pro's con's but Ltd Co is likely to be a serious consideration. Whatever shape the relationship takes they should clearly record in writing what the terms/details are. If its a Ltd Co this should probably be in a Shareholder Agreement but it could potentially just be part of the Article of Incorporation. If its a partnership there should be a proper Partnership Agreement. Its a good test of the mate if he's serious if he is willing to sit down and think through these things or just hoping that he can be his own boss with no headaches (in which case just sub contract or employ him!).

The agreement should cover things like:
- what investment / capital / cash they are each putting in, and when they might get it back
- what their ambition is, e.g. just use as a vehicle for work, grow and sell, grow and keep, grow and pass on to children, etc.
- what happens if they want to sell the business
- what if one of them wants to sell their share
- what if one of them dies or gets really ill
- what to do if they aren't both pulling their weight or they fall out
- what if they want to bring on a third partner
- what to do if they want to borrow money or get investment
- how they will distribute profits
- what they will do if the work slows down and there isn't enough to keep them both going

None of it is very complex but certainly, any of those things can be a total mess if they don't discuss it upfront.

Sole trader and trading in partnership with another/others are the two ways of not working as an employee (they are mutually exclusive). But as many have noted above, "not being an employee" does not exactly correlate with how you pay tax/ have it deducted.

really good points poly which is why i fear that may be the messier option.

@sadexpunk So he’s definitely self employed / a sole trader then so in terms of moving forward tax-wise he’s good to go, all he needs is work/clients.

I don’t think he should worry about a LTD co unless a specific need arises or it grows quickly, by which point an accountant is kinda a necessity and will
advise.

Partnerships are fine (just another type of self-employment and another page in the tax return) just go in with eyes open. Just cos it’s 50:50 on paper and that’s how the profit gets split on the tax return doesn’t always equate to who’s spent all the money out the business bank account.

Also be aware that getting his own jobs and subbing the work to others will make him a CIS contractor and so up to him to setup a scheme, deduct the tax, pay it over etc.

https://www.gov.uk/what-you-must-do-as-a-cis-contractor/who-is-covered-by-cis

So he’s definitely self employed / a sole trader then so in terms of moving forward tax-wise he’s good to go, all he needs is work/clients.

does he need a company name or anything official like that?

does he need a company name or anything official like that?

Nope. As a sole trade it is always M. Y. Name trading as ‘putyournamehereifyouhaveone’. So if you don’t have a trading name it’s just your name.

Edit: to add, if he does create a brand/trade name for private work but not use it for existing sub-contract work, different invoices etc. You could argue that’s two trades and so you should complete 2 separate self employment pages in the tax return. I’ve several freelance self-employed ‘trades’ inc. accounting/tax related and only ever complete one self employment page.

I'm a painter and decorator by trade although over the years have moved into taking on more general building projects by dint of being able to turn my hand to other skills.
Two's a crowd for setting up a decorating business, halves the profits. He needs to set up as a sole trader as does his mate and do their own jobs. If either of them get a reasonably sized job on then they can get the other one to come and work together for that one job. Most customers will want room only to be painted rather than a whole house. Stairwells are popular because diyer's find the access issues too much.
Good luck to the lad, it should take off quite quickly if he puts his name about.
My one tip would be politeness and friendliness go a long way in getting a good reputation.

Oh yeah and return messages and turn up when you said you were going to… still waiting for the roofer who was going to get some scaffolding and tidy up round our chimney breast this time last year…

essentially sole trader and self employed are mostly the same thing.

sort of - people tend the use 'Sole Trader' and 'Self Employed' interchangeably - the governments 'Self Employed Income Support Scheme' was in reality  a  "Sole Traders Income Support Scheme" only and missed out millions of self employed workers. - Sole Trader is one of the ways you can be self employed. Its the default kind of self employment in that you're a 'sole trader' if you work for yourself and haven't put any other kind of formal structure (such as Ltd Company or Partnership) in place.

You can also be a sole trader and be paid PAYE - a lot of people in my industry (film and tv) are termed as 'Freelance PAYE' - not employees in the traditional sense, as they jump frequently from production to production, but in many roles if the tenure is more than a couple of weeks they get taxed at source - but they still get all the fun of doing Self Assessment.

A slightly different distinction:

Soletrader sell footwear, where as soul trader will get you into all kinds of trouble...

does he need a company name or anything official like that?

You can 'trade as' anything but you only have a 'Company name' if you've registered as a company with Companies House with all the duties and liabilities that entails. A 'trading name' is just a nickname really.

So you can call your business what you like but it'll still be your own name on the the bank account, invoices, tax returns, insurance policies and so on. A 'Company' is a legal entity in its own right - you're creating a legal structure which is separate from you - but which you have a controlling stake in - that can open bank accounts, take out loans, sign contracts and so on in its own name. A company can also 'trade as' anything it likes. But don't you words like 'Company' or 'Limited' in a trading name if you're neither of those things.

So as a sole trader you can trade as 'SadieSpunk Plasterers' if you like but don't call yourself 'SadieSpunk Ltd' unless you've created and registered a Limited Company with that name.

One thing to be careful with is banks are now very particular about payee info when you're getting paid by clients so a drawback of trading under a name other than the one you've opened your bank account as it causes all sorts of headaches when customers enter that name rather than yours when making payments.

He’s not self employed is he.

He is, and don't fill in the employed section of the annual tax return. He should regard the tax deducted at source as a savings plan that pays out after the return is agreed by HMRC and personal allowances are credited back.There were many poor chaps who made a mess of it and had to go on Universal Credit as the computer said no.

There were also many (say taxi drivers) who had under-declared their income and got burned as a result with a very small grant and no universal credit.

"EDIT: also, would it be more problematic setting up as a partnership than sole trader?"

It may be very problematic. As I remember it, though it may have changed, your son would be liable for any liabilities the other fella may have, and vice versa. He would have to be VERY certain he trusted him 100%!

Sounds similar to me TBH, I'm a self employed Deccy who mixes my own jobs with CIS work for some local builders I'm in with. Works for me and has done for years, though the only way to make 'proper money' in my game is to have lads work for you. I CBA with the hassle though, more to life.

One thing to be careful with is banks are now very particular about payee info when you’re getting paid by clients so a drawback of trading under a name other than the one you’ve opened your bank account as it causes all sorts of headaches when customers enter that name rather than yours when making payments.

some worse than others, had a customer trying to pay me at christmass and there bank(can't remember which now) wouldn't let them untill they had added my middle name in. i've never had that with any other customers but if it becomes more common i'm going to have to alter my invoice template.

if you do trade under a differant name to yourown you just need to make sure the banking details on the invoice state the right name for the bank account.

Well, the CIS scheme is a special case!

https://www.gov.uk/set-up-sole-trader

another good link, thanks @paton

so....reading that gov.uk link i dont think he needs to actually do anything to start as a sole trader then as hes in the CIS business, sends off a tax return (even tho tax is deducted by his gaffer at present) and doesnt yet subby out any work? hes 'automatically' a sole trader?

am i right in thinking that all he needs to do is tell his gaffer that hes going it alone, hes giving 1 months notice say and then hes off the books.
not sure if thats something that would p1ss a gaffer off or not, what do you think? if my lad was to say i'll still do some work for you if you like, for the same money, but ill sort my own taxes etc out...... is that more appealing to his gaffer or a PITA? is he likely to be told to sling his hook 'you back-stabbing little oik'? 😀

i think from reading that link that my lad would need to be on top of his paperwork a bit more, sending monthly reports to HMRC on any subbies hes paid, even if he hasnt used any which is likely to be the case for some time.
i dont mind helping him with this at all, i could sort his paperwork, receipts, reports for a while to help him out at the start as i realise itll all be a bit overwhelming maybe.
and ill recommend he uses an accountant each year for his annual tax return.

Sounds similar to me TBH, I’m a self employed Deccy who mixes my own jobs with CIS work for some local builders I’m in with. Works for me and has done for years, though the only way to make ‘proper money’ in my game is to have lads work for you. I CBA with the hassle though, more to life.

thanks @halifaxpete i'll drop you a message if you dont mind. interested in how youve set your stall out with the mix of domestic and CIS work and any complications with taxes and record-keeping.

if my lad was to say i’ll still do some work for you if you like, for the same money, but ill sort my own taxes etc out

he wouldn't have the choice to sort his own tax, if he's doing any subby work they have to take tax for him.( it can be done but if he's just starting out its not feasible)

he can do both though, my work used to be 50/50 but now it's nearly all private work.

i would advise to use an accountant though, mine is all fairly basic so i don't get charged a lot(less than £300 a year) by keeping good records for him but he knows all the extras you can claim and the best ways of putting large purchases(like a van) through.

Basically they don’t trust people in construction to pay their tax, so take it at source.

A system to get tax off people in the bottom echelons of employment yet there is no workable solution to rich people not paying, who'd have thought it!

You might find this helpful and do follow all of the links
https://www.simplybusiness.co.uk/knowledge/articles/2021/07/difference-between-sole-trader-and-limited-company/

he wouldn’t have the choice to sort his own tax, if he’s doing any subby work they have to take tax for him.( it can be done but if he’s just starting out its not feasible)

oh ok, interesting. so say hypothetically, his current gaffer wanted to bring his old gaffer alongside to help finish a big job, he couldnt just pay him for his help, he'd have to 'employ' him for it and pay his tax etc even tho they both own the companies?

i would advise to use an accountant though, mine is all fairly basic so i don’t get charged a lot(less than £300 a year) by keeping good records for him but he knows all the extras you can claim and the best ways of putting large purchases(like a van) through.

yes, good advice.

You might find this helpful and do follow all of the links
https://www.simplybusiness.co.uk/knowledge/articles/2021/07/difference-between-sole-trader-and-limited-company//blockquote >

thanks, i'll have a read of that shortly and pass it onto my lad too.

 

oh ok, interesting. so say hypothetically, his current gaffer wanted to bring his old gaffer alongside to help finish a big job, he couldnt just pay him for his help, he’d have to ’employ’ him for it and pay his tax etc even tho they both own the companies?

in that situation they would probably qualify and be registered to recieve the full money without tax being deducted, i don't know the details and what critea has to be met but you can be registered to recieve full payment.