Can I employ myself as a sole trader? Here’s our advice
When you had to decide between taking a traditional job that would see you working as an employee and setting up your own business, you probably spent a lot of time weighing up the pros and cons of each option. While both options have significant benefits and drawbacks, most people will eventually come back to how much money they can earn. Job security also forms a large part of the decision-making process, and a lot of people will spend time wondering if they can be self-employed and handle the lack of security and benefits, including pension contributions, holiday pay, and paid sick leave.
If you have decided to take the leap and become self-employed, or start up as a sole trader, then you might be wondering how you can lighten the burden of insecurity and lost benefits. One seemingly easy way to do this is to simply employ yourself and offer yourself the benefits of any employee. While this may seem like the best option and an easy way to give yourself the best of both worlds, the legality of being your own employee is somewhat questionable.
The question becomes, can you be a sole trader employing staff while also being an employee to your own business. Although you are allowed to be both self-employed and employed at the same time, the question of employing yourself is a bit more tricky.
If you are trying to decide on the best way to stay self employed while being a salaried employee, we have done the digging for you to help you find the best solution.
Owning your own business
Owning your own business is a great way to make sure your can get the lifestyle you want while working for a company that has the same values as you do. Creating a business can also be a good way of ensuring an income if you have been laid off or are struggling to find work.
If you have decided that you want to work for yourself, there are several options available to you:
You could choose to become a sole trader, offering services to other companies or running your own small business. You are personally responsible for any losses and may have to work overtime or cover costs if your work doesn’t meet your customer’s standards.
Partnerships can be set up between multiple people who share the responsibility of the business.
Limited companies are an option for people who want to be legally separate from their business. This helps with managing finances and ensuring they stay separate from personal finances. A limited company will have shares and shareholders and keeps the profits it makes, investing them back into the company, or distributing them as dividends.
Each type of business is suitable for different needs and has different legal requirements. For instance, if you are self-employed you don’t need comprehensive books for HMRC and tax returns, but you also are unlikely to have shareholders who help fund your business. On the other hand, a limited company will have investors, but will also have a lot more administration in the general running of the business.
What is a Sole Trader?
A sole trader is often the business term used for someone who is self-employed. Sole traders are able to earn money and keep all the profit after tax and can earn on either goods or services. As a sole trader, you would be the owner of the company with no co-directors or partners. Any money that you earn through your business is automatically yours and you don’t have to set yourself a salary or invoice yourself. All you have to do is make sure you have paid your tax on any taxable income through a self-assessment form on the HMRC portal.
Sole traders can have employees, but will always remain the owner of the business. They are responsible for their own taxes and must report their expenses and income to HMRC at the end of every financial year.
Being a sole trader is the simplest business structure with very simple requirements for tracking business finances. It is the most popular form of self-employment in the UK and is a rapidly growing industry.
Sole traders include:
Freelancers – many people in the creative industry are sole traders as writers, designers, artists, gardeners, or plumbers
Business consultants – offering advice and services on short-term contracts to other businesses
Small business owners – selling goods online or from a shopfront, or selling services such as plumbing, mechanics, or construction
There are endless options for sole traders and a lot of entrepreneurs will choose to start out as sole traders while they build their company. Once the business is larger and they can invest more time and money into complicated financial records and business laws, they can then change their business to the next suitable business structure.
What is the difference between a sole trader and being self-employed?
In essence, there isn’t much of a difference between being a sole trader and being self-employed. Sole trader is the term used to describe your business structure, while self-employed is the term used to describe your own employment state. Being self-employed can often simply refer to the fact that you pay your own tax and national insurance contributions instead of paying through PAYE.
Sole traders are viewed as the same legal entity as their self-employed selves. Instead of being an employee of their own business, they are viewed as the business, taking on the responsibility of personal and business finances.
Employing other people as a sole trader
As a sole trader you are able to employ staff, as long as you remain the owner of the business and continue to have complete responsibility for all incomes and expenses. The “sole” in sole trader refers to the individual who is linked to the company. Your company will always trade under your name and be viewed as a single entity with you but you can still employ people to work within your small business.
There are no restrictions on how many people you employ or how you employ people. You can employ freelancers, part-time staff, permanent staff, or contracted staff – whichever suits you the best. Your could even set up a zero hour contract which puts fewer restrictions on you for offering fixed hours of work.
But there is a big learning curve in the administration of your business when you choose to hire someone. It becomes your responsibility as a sole trader to set up payroll and handle employee contributions and benefits, including PAYE, NIC, paid and unpaid leave, sick leave, and maternity pay and leave. You will need to register with HMRC as an employer (this will not change your sole trader status) and will need to set up PAYE.
Can I employ myself as a sole trader?
The simple answer is no. Sole traders are viewed by the law as a single entity, meaning you and your business are the same thing. Under English law you cannot create a contract with yourself. This means that you cannot sell to yourself or buy from yourself because the transaction would be void. It also means you cannot employ yourself.
Because a sole trader trades under their own name, it also means their business account is under their own name. A transfer of funds between your own accounts will only ever be treated as a transfer of funds, not a salary payment.
If you were looking to create benefits for yourself through employing yourself then you will need to either budget them into your own projected income, or look into different forms of business ownership.