There no real clear distinction between being self-employed and being a sole trader and, in fact, it’s possible to be both at the same time.
Sole trader is just a way to describe what type of business you are (and no, we’re not talking someone who buys and sells the bottom parts of shoes here).
Some businesses are partnerships, others are limited companies, franchises or other multi-layered off-shoots of larger corporations. A sole trader is one person running one business – essentially, you’re your own boss. There’s no board of directors or partners, so the sole proprietor can enjoy all the profits of the business themselves. However, they are also personally liable for any losses the company incurs and are also responsible for paying tax on profits.
A sole trader can employ people, but must then operate a PAYE (pay as you earn) system whereby they must collect tax and National Insurance contributions from their employees.
What does self-employed mean?
Self-employed refers more to how someone works rather than what their business structure is. A self-employed person can choose which jobs to do and invoices the clients accordingly. He or she is responsible for paying their own taxes through self-assessment. However, there’s no sick or holiday pay. A self-employed person cannot take a fortnight off knowing that they’re guaranteed income during that period.
Examples of self-employed people are freelance photographers, business consultants, electricians, tradesmen, bricklayers or builders. Generally, these type of people will be classified as sole traders too. They can work for as many clients as they want but they are also ultimately responsible for the success or failure of their business.
What insurance cover does a sole trader need?
Sole traders and self-employed workers also bear a greater level of liability than large companies. When something goes wrong and you are a sole trader, it’s not difficult to find out where the buck stops.
Any sole proprietorship should, therefore, have public liability insurance to protect them from costly claims which could put their very livelihood under threat. They should also consider professional indemnity cover in their sole trader insurance to guarantee the quality of their work, service or advice.
Any sole trader who employs at least one person, even on a part-time basis will also have to take out employer’s liability insurance to protect them from claims brought against them by the people who work for them.