When deciding to make the shift into self-employment, there are a number of different routes to take. Here, Business Advice explains the difference between freelancers and sole traders.
Whether working as an independent freelancer or running a wider business as a sole trader, it’s important to be aware of the definitions of the terms and the distinctions between them.
What is a freelancer?
Crucially, “freelancer” doesn’t refer to any kind of legal status. More than anything else, the term refers to the type of work and the way it is undertaken.
For example, freelancing is common in the media, creative and consultancy industries, where short-term work is the norm. Freelancers generally serve multiple clients, charging a daily or hourly rate for their services.
A freelancer will always be identified under the broad umbrella of self-employment, but it’s important to note a freelancer can work as a sole trader, as a limited company or a business partnership.
The difference between freelancers and sole traders largely comes down to the type of work somebody does.
An example of a freelancer could be a voiceover artist – recently found to charge the most lucrative rate at £68.16 per hour – or a photographer with a list of regular clients.
While rates may seem high, work can be irregular. Even if hired by a large organisation, freelancers aren’t entitled to typical workplace benefits such as sick pay or annual leave.
As far as HMRC is concerned, a freelancer is still self-employed and the owner of their own business. However, due to the nature of “gig” work, it is unlikely a freelancer will employ a staff member.
What is a sole trader?
A sole trader, on the other hand, could refer to any kind of small business.
It is a more narrow definition of a specific structure. A sole trader is generally seen as the most simplistic of the business structures – limited companies and business partnerships being the others.
As such, it is the most popular choice for people making the switch to self-employment. There are an estimated 3.3m active sole traders in Britain, compared to 1.6m limited companies.
Unlike a limited company, there is little legal distinction between a person and the business – sole traders are personally responsible for company losses. To set up as a sole trader, you must register with HMRC and complete self-assessment tax returns every April.
A sole trader might also employ staff members – a key difference between freelancers and sole traders. If hiring employees, they must collect income tax and National Insurance contributions each month and pay to HMRC.
What is the crossover?
Both freelancers and sole traders are likely to refer to themselves as self-employed. Neither work for another employer or pay tax through PAYE.
A freelancer could be registered with HMRC as a sole trader, but not all sole traders are confined to the definition of a freelancer.
How to tell the difference between freelancers and sole traders
A sole trader is defined by its business structure, but a freelancer may choose how they operate.
A freelancer is unlikely to employ staff members, and might use an agency to advertise their work. Other sole traders are unlikely to do this.
To a freelancer, the business is essentially themselves and the service they provide. Any small business could be registered as a sole trader with HMRC. Sole traders could take the form of any small company, from retail to a creative agency.
Another way to identify the difference between freelancers and sole traders simply is how revenue is generated. Freelance work is predominantly client-based, and usually focuses on commercial customers. Most sole trading business owners have a broader target market.
If you are one the UK’s 1.9m freelancers, check out our relevant content:
- Vast majority of freelancers do not want any workplace benefits
- Seven in ten freelancers asked to work for free in 2016
- Rising inflation set to inflict damage onto Britain’s freelancers
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